taxud/2414/08 - European Commission - Europa

Strategic and tactical asset management and asset allocation plays a role in portfolio
construction for institutional investors and in funds in particular. When market volatility
spikes, the natural reaction for investors often is to run for the exits. Strategic and tactical
asset allocation basically consists of establishing a larger plan, a longer-term view and a
steady hand which to overcome shorter term volatility of markets and create new
opportunities to maximise returns; this technique adopts a longer term investment view
while paying close attention to an investor’s cash flow requirements and securing
positive absolute returns through a wide range of short-term strategies. It consists of the
following elements:
- Plotting the client’s investment position: the risk/return objective, risk tolerance,
liability and cash flow profiles and the regulatory framework for example;
- Mapping the route to the investment objective: For a fund, whether it is a defined
contribution (DC) or defined benefit (DB) scheme is a further factor in deciding how to
allocate assets strategically;
- Assessment of “Assets’ past performance, the impact of market shocks, risk tolerance
levels, economic fundamentals;
- Determining the diversified investment portfolio on the basis of expected long-term
returns, asset correlations and estimates of risk, analysing the "DNA" of assets, their
growth potential, their short-term volatility characteristics, their diversification benefits
as well as their hedging characteristics.
Logically, there is usually room in such a portfolio for short-term strategies to add
“alpha” returns. These can come, for instance, from the fund manager’s skill to actively
exploit return differentials between and across asset classes, markets, investment styles,
currencies and commodities. This can be done through tactically pairing short and long
positions with a horizon of up to one year. This, in other words, is tactical asset
allocation. In general this involves having a global scope and using a wide range of
opportunities with a large, diversified array of risk/return cycles. The focus is mostly on
markets and indices rather than on individual stocks, adding that instruments such as
futures and exchange-traded funds allow for low-cost and scalable, liquid and flexible
exposure.
A key feature for recognising strategic and tactical asset management and asset
allocation is that it is not too concerned with low-probability events. Its stance is to
accept volatility and construct "all-weather" portfolios where a steady-hand policy limits
portfolio turnover and management costs and where volatility translates into
opportunities to actively earn returns from market inefficiencies.
(b) operational asset management, including stock selection, decision making and
implementation, decisions to buy and sell investments, netting of trades, pretrade
broker liaison, administration and control of trades and post-trade liaison
with brokers and custodian;
Operational investment management is the professional management of various
securities (shares, bonds etc) assets (e.g. real estate) in funds to meet specified
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