Tactical Asset Allocation - when is it appropriate to use? (from Abel practice problems - #2)

Can someone clear this up for me? TAA is when an investor overweights and underweights an asset category to take advantage of short term rates. But then it also says to not alter a policy portfolio if long-term relationships are not affected.

What does it mean by “TAA is active management at the asset-class level”? Are equities European equities or NA equities not considered “asset-class level”?

International equity and domestic equity are two seperate asset classes.

What I believe it is saying is that there are minor shifts in the asset class weights to take advantage of short term rates.

^Yes it says that but in an IPS, it also says to not change the weighting if it doesn’t affect the long term outlook.

Can somebody clarify this for me? When is it okay to use TAA?

From book 3, page 275: “TAA is based on short-term expectations and perceived disequilibria.”

But in exams and questions, tactical adjustments should be made only for long term outlook, not short term return expectations.

What exam is that?

TAA is for short-term discrepancies in asset pricing levels, i.e. “my SAA says 40% equity allocation, but I think equities are undervalued vs. the other asset classes currently so I will increase that to 45% short-term”.

Within the IPS each asset class is given a weightage range, eg Equity should be 35-45% of the portfolio. If you currently hold 35% and you believe that equity is set to outperform other asset classes you reduce the weights in those to the minimum allowed by the IPS and take equity upto 45%. That is the short term Tactical asset allocation. The long term strategic is that range of 35-45 and unless there is a very strong reason to change those weights for the long term, (eg sudden change in financial condition, can no longer own high risk assets), it remains the same.

Tactical asset allocation is predominately used in the short-term as asset class weightings are reallocated in order to allow the portfolio to best take advantage of pricing dislocations present in the market. These pricing dislocations/discrepancies are also referred to as disequilibria.

It’s best to utilize TAA when the manager believes he can deliver incremental alpha to his current positioning, often determined on a risk-adjusted basis.

Bad wording, confusing answer. My opinion.

Seems that the central point in the question is the sentence in the text:

" If markets develop according to my expectations, in 6-12 months I will shift my strategic allocation back to the original target percentages listed in my investment policy statement". Maybe 6-12 months is considered LT and not ST so not allowed to shift target policy weights.

By the way I disagree the following CFAI 's answer in the sentence: “TAA is active management at the asset-class level and may be accomplished with an ongoing and systematic program of tactical asset weight adjustments.”. We are far from reality. Even if I’m a quant and I strongly prefer systematic framework, I disagree this statement: why should we only use only systematic tools in SAA? A bit confusing no?

Or maybe I did not understrand something…?

Are there any other thoughts on this? Like the OP, can’t see why this is not tactical allocation??? What do you think??? Could be something we could easily be tripped up on when exam day arrives.