Financial crisis sparked migration away from buy and hold, Cerulli study shows
There is nothing quite like a seismic market shift to throw financial advisers off their game.
This has been the case since the 2008-09 financial crisis, according to the latest research from Cerulli Associates Inc., which shows that advisers have been migrating away from buy and hold toward more active strategies.
Nearly half of Cerulli's database of more than 10,000 advisers said that they are employing some form of tactical portfolio management.
When the same survey was conducted in 2009, tactical strategies didn't even register among respondents, according to Cerulli associate director Tyler Cloherty.
“After the financial crisis, there seemed to be a general sense that long-term strategic allocation strategies didn't work,” he said. “So in order to position themselves to clients, advisers started indicating that they were navigating away from risky assets and capitalizing on shorter-term opportunities.”
Strategic investing comes in all shapes and sizes, but Cerulli found that 37% of advisers surveyed said that they are using a strategic allocation with a tactical overlay, and another 8% said that they are strictly tactical. That adds up to a total of 45% of the respondents applying tactical strategies.
This is about where advisers have been in terms of tactical strategies ever since the initial spike, said Mr. Cloherty.
Theodore Feight, owner of Creative Financial Design, exemplifies the transition away from strategic portfolio management.
“I'm absolutely more tactical, and my clients are enjoying it,” he said.
Mr. Feight became a believer during the financial crisis when he witnessed virtually every asset class fall in stride.
“Adjusting to tactical strategies made me go back and look at some of the stuff I was taught in the past,” he said.
These days, Mr. Feight is comfortable about setting stop orders to limit losses and seek out other areas of opportunity.
In the fixed-income arena, for example, he has gone from static allocations to low-yielding indexes to a more aggressive blend of high-yield-bond exchange-traded funds.
The result is a 300-basis point increase in yield to about 5% for his fixed-income investments, Mr. Feight said.
On the equity side, he also has moved away from broad indexes to take more specific advantage of some of the higher-yielding dividend stocks, such as Altria Group Inc. (MO), Eli Lilly and Co. (LLY) and Reynolds America Inc. (RAI).
“I started doing this in 2009, and I've been an outlier until recently,” Mr. Feight said. “I have had a lot of people tell me I'm nuts, and that I should just stick with buy and hold.”
Paul Schatz, president of Heritage Capital LLC and member of the National Association of Active Investment Managers, said that he isn't surprised that more advisers have turned tactical since 2009.
“It is absolutely crazy to not have at least a portion of a portfolio actively managed at all times,” he said. “Everybody knows that markets drop faster than they rise.”
Mr. Schatz said that he has recently begun hearing institutional managers talk about shifting back toward buy and hold, now that the markets have had a strong run.
“People historically have turned to tactical after the horse already left the barn, and now that the stock market is up 125% from the bottom, people are starting to talk about buy and hold again,” he said. “To me, any time people start talking about buy and hold being the way to go, it's a good sign that the market is at a peak.”
Mr. Cloherty is less interested in whether advisers are moving in and out of tactical strategies at the wrong time than he is about how qualified most advisers are to execute tactical strategies.
“If you have advisers attempting to be tactical, you will have a mixed bag of performance, because a lot of it is based on their own internal decision making where there might not be a strict framework,” he said. “An asset manager or professional research team might be better suited to apply tactical strategies.”
