What is the difference between Strategic Asset Allocation vs. Tactical Asset Allocation?
While implementing AA approach, clients’ goals, liquidity needs, risk-return expectations are incorporated to define an investment goal. A combination of traditional asset classes like equity, bonds and money markets with alternative asset classes like commodities – to give an example – is suggested. Strategic Asset Allocation (SAA) is the long term combination of various asset classes that matches the client’s risk profile and long term target. The primary factors driving SAA would be the long term return drivers for each asset class and the covariance matrix (correlation and volatility). Tactical Asset Allocation (TAA), however, is more dynamic in that it takes into account short-medium term prospects for financial markets. The key factors driving TAA are for example the economic/ business cycle, market implied expectations, technical factors and sentiments. Tactical changes allow the client to be more dynamic especially in extreme times as seen in 2008 rather than having a ‘buy and
