BenchmarkingBenchmarking and Tactical Asset AllocationTactical asset allocation

A benchmark, usually an index, is often used to analyze the risk, return, and performance of portfolios. We have already distinguished between passive management, which merely duplicates a benchmark index, and active management, which tries to “beat” it by deviating more or less from it. Active management generally has two phases. The first, described as strategic, was discussed in the previous chapter. It determines general policy and, as such, is concerned only with broad asset classes and long-term horizons. But once the large classes and trends have been determined, the manager most often proceeds with Tactical Asset Allocation, which concerns the weighting of the various asset classes (which may differ, in the short term, from the strategic weightings) as well as the choice of individual securities within the same class. Tactical allocation is a bet on the manager’s ability to detect under- and over-valued assets and/or predict market reversals. The tactical allocation horizon is thus generally short, typically in the order of 3–6 months.