June 13, 2024
  • Keep tactical portfolio at 20-25%, based on product availability and lock-in period

As an investor, you are focused on one thing–optimizing your risk-adjusted returns over the course of the investment tenure. How do you make this objective a reality? The first thing to remember is that, while higher risk correlates to higher potential for returns, a healthy portfolio must have a combination of risk and security. This is where asset allocation comes into play. When you divide your portfolio into different asset classes with a low correlation, you will end up earning optimal returns from each category, while also limiting loss.
Currently, there are multiple investment opportunities available, such as private equity, venture capital, structured credit, MLDs, and offshore investments, etc. These have the potential to add an element of alpha to your portfolio. However, can they become a core part of your portfolio? Probably not.
Thus, while it is well-known that asset allocation is the cornerstone of a robust long-term portfolio, the first step to enable this is to understand the two ways by which asset allocation can be done–strategic and tactical.
Strategic allocation is aligned to your basic risk-return profile and seeks to ensure stability of the portfolio around a defined objective. Under this strategy, you can set target allocations for different asset classes, based on your risk profile, goals, time horizon and return expectations. Once this is done, based on your evolving requirements and market changes, you can periodically rebalance the portfolio to stay aligned with your asset allocation strategy. This is a comparatively less active technique.
Core allocation is usually in the range of 70-100% based on the investor profile. This sits on your core strategy and helps you take an active stance on asset allocation and adjust exposure to asset classes based on short-term market trends and opportunities. For instance, if IT sector seem to be attractive for a short period, you may want to go overweight on the sector, which is a relatively active strategy that requires close market-monitoring as well as being nimble-footed in taking decisions aimed at capitalizing on the available opportunities. A good wealth manager can help you with research-backed themes and trends.
Tactical portfolio generally shouldn’t be more than 20-25% of the overall portfolio based on product availability, lock-in and client comfort, and are generally meant for short periods.
How can one combine the two to optimize portfolio returns? Start with creating an investment policy with help from a qualified investment manager that captures all the factors such as asset class mix, returns, restrictions, cash flow, liquidity, etc. This will help in arriving at your strategic asset allocation. However, remember to keep some liquidity in the portfolio as this will allow you to participate in emerging tactical opportunities.
An emerging trend within tactical allocation is to have some incremental allocation of say 10-15% from core allocation into long-term tactical exposures through newer investing trends which seek to increase returns like venture investing, early-stage investments as also international investing. In such cases, moving from core to tactical bucket could also be based on:
• Net returns (post tax and expense) for fixed income alternatives being greater than 150-200 basis points versus its core alternative.
• Theme within listed equity buckets not available in traditional portfolios. Sectoral/thematic PMS/AIFs will form a major part of the bucket.
• Alternates not available on traditional platforms–private equity / long, short etc.
• International exposure via listed / unlisted equity, global fixed income and global alternative opportunities.
Monitoring the portfolio periodically helps in ring fencing the gains that such tactical opportunities provide by getting out at an appropriate time and waiting for the next opportunity to invest. However, never go overboard in rejigging the portfolio.
Nitin Rao is CEO at InCred Wealth
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