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Cowboys?

27 July 2004 Angelo Coppola

(28.7.04) A great deal has been written in the press lately on the debate between strategic and tactical asset allocation.

Adrian Claytonat PSG Fund Managers says he enters the debate by initiating discussion with the obvious, which press articles I have read fail to address.

What is strategic and tactical asset allocation? Strategic asset allocation is the process of positioning products or portfolios in line with historical asset allocation mixes.

The term 'strategic' obviously emanates from strategy, which the Oxford dictionary defines as 'the art of war, especially the planning of the movements of troops into favourable positions.'

For those that have studied strategy, it will be known that strategy as defined by the dictionary has an implicit duration - long-term.

This is precisely why strategic asset allocation is about using long-term or historical performances of asset classes and to blend current portfolios in such a manner as to replicate what transpired in the past.

The assumption that is made by the strategic asset allocator is that history repeats itself. Those with a serious tactical bend tend to forego historical analysis and rather focus on the current.

Drawing on the dictionary again, tactics is defined as the 'art of placing and manoeuvring armed forces skilfully in battle'. Tactics are shorter term in nature and require action, whereas strategy tends to be more enduring.

In the extreme sense, our industry contains market timers, these individuals believe that they can tactically position a portfolio over very short periods of time and consistently read changing market conditions.

I like to describe them as the tactical cowboys.

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