Even as more active forms of asset allocation become more available as options for portfolio management, there remains a lack of consensus among investment advisors over the differences among them. I recently sat down with Brian D. Singer, CFA, CEO and Chief Investment Officer of Singer Partners, to learn the reasons for his firm’s focus on tactical asset allocation as a core investment strategy.
Below is Part 1 of our exchange, in which we attempt to define tactical asset allocation, compare it to other asset allocation methods and learn how advisors can implement it successfully.
Mike Henkel: From your perspective, what differentiates tactical asset allocation from other asset allocation methods?
Brian Singer: I would say that strategic is passive with long-term (10- to 20-year time horizon); dynamic is active with a medium-term horizon (two- to 10-year horizon), and tactical is active with a short-term horizon (daily to two-year horizon). I should also note that these allocation methods aren’t mutually exclusive—you can start with a strategic allocation portfolio and incorporate dynamic or tactical strategies within it.
The phrase "fundamental values" is introduced without perspective. Perhaps we could state that it represents an asset's value as a cash-flow producing security and that value does not change much over time, consistent with longer-horizon investing.
Henkel: How does Singer Partners’ Edge Portfolio differ from your other investment strategies?
Singer: It comes down to objectives and constraints. At Singer, we believe market prices are more volatile than the fundamental value of the underlying assets, and these discrepancies create potential investment opportunities. The Edge Portfolio [available on the Envestnet platform] follows our overarching conceptual approach, but it uses only ETFs and is also a total return portfolio. It is less constrained in its tactics, using long, inverse and leveraged ETFs in order to manage risk. In contrast, we have other portfolios built around a specific risk level that seek relative return to the underlying benchmark. This means we position those portfolios in an effort to achieve return in excess of the benchmark’s returns without exceeding benchmark risk levels.
Henkel: What is unique about your dynamic asset allocation model, compared to others?
Singer: Philosophy and process are the key differentiators. Philosophically, we’re fundamental investors. For us, this means being committed to investing only in assets with identifiable cash flows that accrue to the asset. Our process, which guides us through this philosophy, involves fundamental valuation, market behavior and risk capital allocation.
Dynamic allocation means we determine an asset or asset category’s fundamental value, and when market turbulence leads other investors to abandon fundamentals for fear and greed, we stay focused on fundamentals. Through market behavior analysis, we seek to determine why asset prices are deviating from fundamental values. This helps us time our asset purchases. Finally, with risk/capital allocation, we determine the correct risk exposure for each position in the portfolio and allocate risk accordingly.
Henkel: What challenges would advisors face if they tried to repeat your three-prong process?
Singer: Most advisors don’t have the resources or time to spend on undertaking all of the hard theoretical work that would support this type of analysis. We’ve spent 20 years formulating and putting into practice this process. A good example is fundamental valuation. Some investors believe that the price-to-earnings ratio (P/E ratio) is a viable estimate of a stock’s value, or that yield spread estimates bond value. But to us, P/E ratios and yield-spreads are merely indicators of market sentiment, not necessarily fundamental value.
To arrive at fundamental value, we spend an inordinate amount of time studying the equity, bond and other markets for cash flows that accrue to investors—dividend, stock repurchase, coupon or other form of cash distribution. We also take into account the capital expenditures that a company needs to remain a going concern and bond default and recovery rates. It takes a lot of theoretical analysis to understand what portion of a company’s earnings can and will accrue to investors. If we were to begin this process today, we would not be able to invest for years. Since we have invested this way for 20 years, we believe we are able to leverage tremendous experience and seasoned judgment.
(Read the conclusion of Mike Henkel's interview with Brian Singer.)