While TAA strategies date back to the 1970s in the US where they used basic value approaches to vary weightings to domestic stocks, bonds and cash, the evidence to support TAA has been mixed, particularly when applied as a fund overlay.
Watson Wyatt maintains that the expansion in the breadth of decisions, as opposed to tactically altering the equity/bond split, should result in more efficient investment decisions. “There can be a place for TAA in a line-up of active ‘return-seeking’ skill-based strategies on a fund’s beliefs and governance,” says the firm.
But it cautions that the risk allocated to this strategy should be “consistent with other active strategies and not dominate the risk taken by the fund.” TAA has been dogged by a poor reputation as a consequence of historic volatile performance from some simpler approaches of earlier years.
Two changes have occurred in recent years that have made the strategy more attractive from an institutional viewpoint. Managers are broadening their scope to include more asset classes and sub classes in their decision sets, providing further opportunity for adding alpha. And the strategies are increasingly being made available through pooled funds which are attracted by their limited liability status. Were a TAA fund to blow-up, the risk would be carried by the prime broker or manager – not the client.
On the downside, there are a relatively few managers that can provide robust and comprehensive global processes. The team at Watson Wyatt rates 14 managers, although they estimate that 75-80 per cent of assets are concentrated among to the top five players.
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