Will the Stock Rally Last? Tactical Funds Don’t Think So

Tactical mutual funds have not been this underweight equity in nearly three years.

Michael Dobson 21 July, 2023 | 1:02AM
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Soaring technology stocks in 2023’s first half lifted the equity markets to one of the strongest six-month periods in the last twenty years. Last year’s stock laggards have been 2023’s front runners so far, but many managers doubt the rally can persist.

Take for example NBI Tactical Asset Allocation, which has made one the biggest asset mix changes among tactical balanced funds. The fund is a key component of NBI Portfolios managed by National Bank Investments’ CIO office. The shift in its asset mix offers a window into the thinking of asset allocators, who, by at least one measure, haven’t been this pessimistic about stocks since October 2020.


What is a Tactical Balanced Fund?

Tactical balanced is the most unconstrained balanced category in Canada with the ability to move from all bonds to all stocks at the manager’s discretion. These strategies arguably represent the most complete picture of an investment manager’s views on the market and economy.

Not that those views often pan out. Morningstar wrote last month about how, at least in the U.S., these funds typically underperformed a traditional 60/40 portfolio. Still, of the average positions of tactical balanced funds provide a glimpse of current thinking among professional investment managers.

The simple average asset mix for tactical balanced funds, including obsolete funds, over the last ten years show their collective and shifting sentiment – fluctuations between pessimism and optimism. The latest large move, which started in the second quarter of 2022, is still underway – and it is a move away from stocks.

Average equity weight reached a high of nearly 60% at the end of March 2022, the highest since October 2017, before pulling back to a still historically strong 58% weight in May 2022. The average equity weight fell to 48% over the next 12 months, the largest shift in the category’s average equity weighting in the last 10 years. Meanwhile stocks rallied in 2023.

National Bank is Not Convinced that Equities are the Place to Be

National Bank Investments made the biggest absolute shift. The NBI Tactical Asset Allocation fund uses low-cost passive ETFs to express short-term views on the market of the CIO Office headed by named manager Martin Lefebvre. The NBI Tactical Asset Allocation fund also serves as the short-term trading vehicle and holds around a 10% weighting in the NBI Portfolios’ six risk options. 

The CIO Office maintains that, with leading economic indicators pointing towards a recession, equity looks less attractive in the short term. So Tactical Asset Allocation looks much more defensive than it did a year ago; its equity stake dropped from over 80% of assets on May 31, 2022, to less than 20% on May 31, 2023, the biggest drop among all tactical balanced funds over that time.


A strong start in stocks, including the best first half for the NASDAQ in decades, surprised many coming off such a dreary 2022. Still, tactical allocation managers continue to be pessimistic which has only grown stronger the more stocks climbed. It’s setting up for an intriguing outcome to observe over the rest of the year – a capitulation of investment managers or a stalled-out stock rally.

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Michael Dobson  Michael Dobson is an Associate Manager Research Analyst at Morningstar Canada

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