In a previous post, we likened correlation to a non-guaranteed insurance policy: changing correlations between rebalances can lead to dramatically different outcomes.  The same is true for diversification, which is underpinned by correlation estimates.  While well-diversified strategic portfolios are a great starting point, the built-in diversification may come with a high implicit cost or may not be properly sized to achieve the desired risk profile.

In our new white paper, The Case for Tactical Asset Allocation, we describe how integrating traditional diversification with an alternative, but complementary, approach can lead to a more effective outcome:

Low, and potentially rising, interest rates make traditional diversifiers expensive, and rising and unstable correlations mean that a static allocation is less likely to deliver a consistent risk profile. We believe that tactical asset allocation that can dynamically react to emerging risks in the market can help supplement diversification and deliver a more consistent risk profile.  By smoothing out the volatility experience, Tactical Asset Allocation (TAA) may enable investors to carry more risk generating assets within their portfolio, which can lead to increased total return over their investment lifecycle.

The paper can be accessed by clicking here.  We look forward to hearing your thoughts on it.

Nathan is a Portfolio Manager at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Nathan is responsible for investment research, strategy development, and supporting the portfolio management team. Prior to joining Newfound, he was a chemical engineer at URS, a global engineering firm in the oil, natural gas, and biofuels industry where he was responsible for process simulation development, project economic analysis, and the creation of in-house software. Nathan holds a Master of Science in Computational Finance from Carnegie Mellon University and graduated summa cum laude from Case Western Reserve University with a Bachelor of Science in Chemical Engineering and a minor in Mathematics.