GTAA
Featured Expert View Bio

Asset allocation needs revisiting

Traditional stocks and bonds are the largest allocations in most investor portfolios. In fact, the 60% stock / 40% bond policy portfolio is often considered the “benchmark” for asset allocation decisions. Investors do two things that hamper their long-term portfolio performance. First, they tend to let their asset allocation drift based on the performance of the underlying assets-- or even worse-- chase performance by allocating to the latest best-performing asset class. Second, their portfolios tend to be dominated by domestic stocks and bonds, often tracking capitalization-weighted indices. This is an inefficient way to manage a portfolio.

GTAA strategy buys low and sells high

Global tactical asset allocation (GTAA) is a strategy that increases investments in asset classes with the highest potential for appreciation and reduces allocations to asset classes with greater potential for loss. Expected returns for different asset classes vary over time and greatly depend on starting valuations. By investing in unpopular assets, GTAA displays a contrarian bent. GTAA uses the constantly changing expectations and emotions of the market to invest in attractively priced assets.

Long-standing expertise

Robert Arnott and Research Affiliates are well recognized in the investment management industry for their expertise in GTAA. The firm is the sub-advisor to the first mutual fund of mutual funds to apply GTAA to alternative asset classes, investing in an array of underlying mutual funds.

Rationale >>

GTAA

Cheap today, expensive tomorrow

Why should investors use a GTAA strategy? The answer is simple: Valuations of assets vary all the time. Equities may be cheap today and expensive tomorrow. Conversely, bonds may be expensive today but more affordable in the future. Return expectations shift constantly; sometimes, taking risk is rewarded, sometimes it is not. Buying what is unpopular and selling securities that are in vogue is hard to do. Unfortunately, most investors do a poor job of deciding when to make shifts in their portfolio.

More than just stocks and bonds

Stocks and bonds are just the two most prominent asset classes. There are a host of other asset classes, such as international equities, emerging market debt, real estate, commodities, TIPs, various credits, real return strategies, that provide far greater diversification than a standard 60% stock / 40% bond portfolio. Investors should employ a full toolkit in building their portfolios.

An absolute-return approach to investing

Our GTAA strategies complement traditional stock and bond portfolios. They provide an absolute-return oriented approach to investing, and are designed to provide protection against inflation-- the main enemy to building and retaining wealth.
Research >>

The following resources provide a deeper look into issues affecting GTAA.

  • Wait for Your Pitch in Today's Market

    Fundamentals
    February 2013 | John West

    Great hitting in baseball depends in part on waiting for the right pitch. In today’s market, most asset classes—coming off their impressive 2012 record--are “high and outside” the valuations necessary for future big league returns. Patience is the name of the game today.
    Asset Allocation, GTAA

  • Hope is Not a Strategy

    Fundamentals
    October 2010 | John West

    Using a “building blocks” of return approach, we find that the classic 60/40 blend of stocks and bonds would generate a return well short of the 7-8% range assumed by many investors. The only way to meet these target returns is through remarkable good luck. We need a better strategy.
    Asset Allocation, GTAA

  • The Glad Game

    Fundamentals
    November 2010 | Rob Arnott

    How can investors meet their return targets in a world of low stock and bond yields? The solution requires abandoning the classic 60/40 blend of stocks and bonds and adopting an asset mix different from one’s peers. Taking these steps is not comfortable, but comfort is rarely rewarded.
    GTAA, Asset Allocation, RAFI, Fundamental Index, Equity, Smart Beta

  • The Rationale for Global Tactical Asset Allocation

    Investments ＆ Wealth Monitor
    November 2009 | John West, Rob Arnott

    For several decades, the notion of a normal portfolio has been central to institutional portfolio management. The classic 60/40 portfolio—60 percent in mainstream stocks and 40 percent in mainstream bonds—has been an unsatisfying norm that still anchors much of the thinking in the investing business.
    Asset Allocation, GTAA

  • De-Stressing Balanced Fund Investing

    Fundamentals
    December 2011 | John West

    Balanced fund management has largely become a benchmark-hugging exercise, with asset allocations confined within a tight band. But there are things that can be done to improve the added value investors can obtain from balanced fund investments. First item on the list: look at the benchmark.
    GTAA

  • The “3-D” Hurricane Force Headwind

    Fundamentals
    November 2009 | Rob Arnott

    The U.S. deficit and national debt relative to GDP is vastly understated. Add in the long-term influence of an aging population and the outlook is bleaker still. Rising deficits, soaring deficits and changing demographics have drastic implications for inflation, stocks and bonds around the world.
    3-D Hurricane, Asset Allocation, Demographics

  • Eggs are Not Enough: The Truth About Diversification

    Fundamentals
    October 2012 | Feifei Li

    We learn in finance theory that diversification simply means not putting all your eggs in one basket. Simple as the idea is, most investors do not hold portfolios that are even close to being truly diversified. Risk premiums vary over time—especially when markets get bumpy.
    GTAA

  • The Long View-Building the 3-D Shelter

    Fundamentals
    October 2011 | Rob Arnott

    In the long run, the combination of rising debts and deficits and aging demographics will create a 3-D hurricane affecting capital markets. Creating a "third pillar" to existing developed world equity and bond allocations should produce more meaningful real returns over a market cycle.
    3-D Hurricane, GTAA, Asset Allocation

  • Institutionalizing Courage

    Fundamentals
    May 2012 | Rob Arnott

    Most people tend to measure wealth in terms of the dollar value of a portfolio. We believe it is better to measure wealth in terms of the real spending the portfolio can sustain over the entire life of the obligations served by the portfolio. We call this approach “sustainable spending.” But focusing on sustainable spending requires real courage.
    GTAA, RAFI, Equity, Fundamental Index, Smart Beta

  • The Newlywed's Dilemma

    Fundamentals
    April 2012 | John West

    A new world of lower expected returns signals a major break from “mainstream” investment approaches. Old investing patterns—for example, tracking error to the ubiquitous 60/40 blend of mainstream stocks and bonds, reliance on “first-world” developed markets, and conventional cap-weighted indexing—may not fit with our new investment priorities.
    GTAA

  • Expected Return

    Investments ＆ Wealth Monitor
    January 2012 | Chris Brightman

    Ten years ago, after two decades of 14-percent annual returns for the traditional 60-percent equity/40-percent bond portfolio, many investors revised their return expectations upwards. Some observers warned at the time that, with a dividend yield of less than 2 percent, the equity market was priced to provide lower rather than higher returns.
    Asset Allocation

  • What Risk Premium is "Normal"?

    Financial Analysts Journal
    March 2002 | Rob Arnott, Peter L. Bernstein

    The goal of this article is an estimate of the objective forward-looking U.S. equity risk premium relative to bonds through history—specifically, since 1802.
    Asset Allocation

  • A Framework for Examining Asset Allocation Alpha

    Journal of Index Investing
    Q1 2013 | Jason Hsu, Omid Shakernia

    The definition of asset allocation “alpha” remains a poorly defined concept, given the lack of a standard theoretical framework and benchmark for these multi-asset portfolios. This article provides a new way for understanding the sources of added value for asset allocation portfolios.
    GTAA, Performance Measurement
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