Canadian Tactical Managers Keep Exercising Caution

The average tactical balanced fund remains weary well into equity rally.

Michael Dobson 21 June, 2024 | 5:00AM
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 Balanced Stones

Tactical balanced is the most unrestricted allocation space in Canada. Funds in this category can change their asset mix from all-equity to all-bonds, or ‘tactically’, and can change very quickly. These go-anywhere vehicles provide a look at the near-term top-down views of allocators across Canada.

Last year, I wrote about how the average tactical balanced fund cut its equity weight despite the strong equity rally. This is an update to estimate how optimistic or pessimistic tactical managers were through May 2024. Asset-weighted average places greater significance on larger funds while the simple average weighs all funds equally regardless of size.

Where did tactical go?

The largest tactical funds show substantial moves. The asset-weighted estimate for tactical funds rose from 46.4% equity to 53.8% equity from June 2023 to May 2024.

The five largest funds in the category increased their equity weights. NBI Tactical Asset Allocation leading the way with a 30-percentage point increase over the last twelve months. Canoe Asset Allocation Portfolio also shows a 15-percentage point increase. A simple average of the equity weight in tactical funds suggests less than 20 basis points (0.2%) of change over the same period.


How well did they do?

Tactical allocation usually involves short time horizons of twelve months or less. To gauge how well these decisions have been, below is a chart that looks at the average equity weight in tactical funds and the forward one-year returns for Morningstar Global Markets Index. This chart looks through June 2023 where we know the ex-post returns.

The last five years have been especially tough for allocators. Tactical funds were at their most underweight stocks in March 2020, the exact trough for the equity index. They were optimistic right before the 2022 bear market. They trimmed stock exposure during a resurgent stock rally in 2023 that continued to persist through May 2024. Tactical managers are hesitant to join in on the equity rally and it seems so far to be another misstep.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canoe Asset Allocation Portfolio Cl F20.12 CAD-0.23Rating
CI Diversified Yield F7.72 CAD0.43Rating
Fidelity Tactical High Income Sr F15.81 CAD0.60Rating
NBI Tactical Asset Allocation PW6.11 CAD-0.65Rating
TD Tactical Monthly Income F16.02 CAD-0.92Rating

About Author

Michael Dobson  is a Manager Research Analyst at Morningstar Canada.

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