Advisers using tactical investment strategies say the latest market drop confirms that their active approaches are right for the times.
But tactical-investing advisers, who believe in re-balancing the percentage of assets held in various categories to take advantage of pricing anomalies or unusually strong sectors, admit that their clients are not always ready to go along with their allocation revisions.
“We have discretion, so they let us do what we need to for the most part, but clients get nervous at these low points,” said Ronald Rough, director of portfolio management at Financial Services Advisory Inc., which manages $560 million.
The nervousness is nothing new. At the end of 2008, when he was out of stocks and just “nibbling” at corporate bonds, some clients balked even at that, Mr. Rough said.
“You definitely get that with people,” said Mr. Rough, whose clients are now just 5% invested in stocks.
Tactically oriented advisers such as Mr. Rough who are willing to make market-timing decisions based on technical and other factors often need to move quickly as things change.
WAIT-AND-SEE MODE
Right now, most tacticians are waiting to see if support levels of around 1,120 on the S&P 500 hold up or, conversely, if the rebound rally shows strength by establishing higher highs and higher lows.
If a market rally ensues, cash-heavy clients who don't trust an adviser's discretion to get back into the market will miss out.
“People just become deer in the headlights” when markets crack, said Steve Rumsey, principal of Optimus Advisory Group LLC, which manages about $35 million in strategies that flip between long and short.
New money coming into his strategy “has slowed way down, not because of performance but the jitters clients have,” Mr. Rumsey added.
In fact, tactical managers themselves often miss major parts of rallies.
“That's the drawback of a lot of [advisers] we follow,” Mr. Rumsey said. In the rally from March 2009 to May 2011, “if you look at competitors of ours, they were barely up.”
On the other hand, some performance-chasing clients are hungrier than ever now that traditional strategies are suffering.
“After a decline, clients realize certain [of my tactical] strategies did better than others, and want to immediately roll into the [best performer] at absolutely the wrong time,” said Paul Schatz, president of Heritage Capital LLC, which runs $102 million among several models.
Tacticians often run a number of stock and bond strategies.
Some investors have seen Mr. Rumsey's portfolios on tracking sites and wanted to throw everything in, based on what looks like good performance.
“We back them away,” Mr. Rumsey said. “Our strategies are meant for a portion of a portfolio. They're risky propositions.”
Many tactical advisers also believe that the market is still in a long-term secular bear market. Such periods historically have been characterized by relatively short but volatile rallies and sell-offs. Without sustained trends, tactical strategies can suffer.
“We won't get in at the bottom, so we hope the run between the top and bottom is long enough so we can make money,” Mr. Rough said.
Robert Kargenian, founder of TABR Capital Management LLC, doesn't completely jump in or out of stocks, because he knows that his market-timing models aren't perfect in calling tops or bottoms.
For example, his moderate-risk accounts now have about 23% in equities, even though he anticipates another down leg in the market.
But his moderation is a trait not all clients appreciate.
“Some clients ask, "If you don't like the market, why not just get out?” said Mr. Kargenian, who manages about $170 million.
"MORE LAISSEZ-FAIRE'
Despite the challenges, tactical advisers contend that their clients have now been through several bad periods and have seen the value in sticking with risk-reducing strategies.
“In this [down] period, my clients have been much better about [dealing with] downside volatility,” Mr. Schatz said. “They saw we did much better in 2008 and 2009,” he said.
“Once they go through a recovery period, clients are more laissez-faire the second time around.”
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