The Morningstar Dictionary: Strategic vs. tactical

Whether portfolio moves are temporary or long-term can help clarify the issue.

Christian Charest 24 March, 2017 | 5:00PM
Facebook Twitter LinkedIn



You may have heard the terms "strategic" and "tactical" used to describe how a fund manages its asset allocation. But while both words find their origin in military applications, their meanings are quite different.

Strategic means something that is related to a general plan created to achieve a goal, whether in war, politics, and so on, usually over a long period. Tactical means something that is related to a specific plan created to achieve a particular goal. The key distinction here is that the former refers to an overarching, long-term effort, whereas the latter refers to a more specific action performed in the service of this larger strategic goal.

So how does this distinction apply to investing? An investment strategy generally refers to a consistently executed long-term plan. For example, a mutual fund that invests in stocks its managers believe are underpriced may be said to employ a value strategy.

As part of their strategies, some funds look for opportunities to improve performance by changing their investment mix more frequently than others, taking a so-called tactical approach. These moves may be based on what the manager thinks is happening or will happen in the markets.

For example, an equity fund manager who believes that higher-risk stocks are falling out of favour may rapidly shift a large portion of his portfolio to blue-chip names. Or, a balanced fund manager may be worried that a bear market is approaching and shifts a large chunk of assets from the equity side of the portfolio to the fixed-income side.

In Canada, balanced or asset allocation funds that use a tactical approach are classified in the Tactical Balanced category. To be included in this category, a fund must have the flexibility to vary both its equity and fixed income components below 40% or above 60%.

For equity or bond funds there is no official line drawn between strategic and tactical investing. Still, a manager who opportunistically adjusts her fund's allocation based on what is likely a temporary change in the market is making a tactical move. One that makes such a shift with the intention of sticking with the new allocation for many years could be said to be making a strategic one.

So how can you tell if the equity or bond fund you own employs a tactical approach? One obvious way is by reading the fund's prospectus to see if it mentions the fund's flexibility to shift assets around at the manager's discretion. Another sign is repeated dramatic changes in asset allocation during short time periods. For example, if you notice that the fund routinely shifts 10% of its assets from one sector to another, that may indicate its managers have a tactical mind-set.

But does tactical asset allocation work? The arguments for and against tactical management are more or less the same as those used in the active versus passive debate. To make a long story short, a tactical approach, just like active investing, gives the manager more opportunity to outperform the market, but it usually comes with higher fees, and very few are successful at it.

Owning a fund that invests tactically is not in and of itself a good or bad thing. The most important thing is that you understand how the fund operates and are prepared for the benefits and risks that come with this approach.

Facebook Twitter LinkedIn

About Author

Christian Charest

Christian Charest  

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy       Disclosures        Accessibility