As an independent RIA or IAR registered firm, you constantly face changes that dramatically impact your business: The economy, securities markets, regulations, AI, and other technologies that impact your business. This rapid change is accelerating, so more advisors are turning to OCIOs (Outsourced Chief Investment Officers) to help them manage their clients’ assets in ways that produce competitive rates of return in a variety of market conditions.
In this article, our team of experienced OCIOs will provide high-level tips on tactically balancing traditional and alternative asset allocations.
Tactical Asset Allocation (TAA) is an active investment management approach that modifies a portfolio’s asset allocation based on the OCIO’s and analysts’ short-term market predictions. TAA exploits market inefficiencies and short-term market movements to manage risk, enhance returns, or both.
TAA can be applied across the full spectrum of traditional and alternative investments, but the considerations and implementation of this investment strategy may vary significantly. Here’s a comparison of how TAA can be used for portfolios and include traditional and alternative investments.
- Investments typically include stocks, bonds, and cash equivalents
- In general, these assets are liquid and very easy to sell.
- There are abundant data available on the performance of traditional investments, from decades of stock prices to what happened two minutes ago.
- Economic indicators are in abundance and provide information about the short and long-term direction of global economies.
- Allocating traditional investment in portfolios has made it easier than even managing money in global portfolios. ETFs have made allocating assets to a broad range of global asset classes even easier.
- Traditional markets are more transparent, with regulations mandating regular financial disclosures from publicly traded companies
- Given the liquidity and data availability, TAA can be executed as frequently as necessary to achieve our client’s goals.
Typical alternative assets include hedge funds, private equity, real estate, commodities, and other non-traditional investments. These assets are generally less liquid and may take longer to sell. For example, changing asset allocations can be more complex and time-consuming – selling a real estate investment may take weeks, months, or years.
There may be limited data available about alternative investments. For example, private companies do not have to disclose financials like public companies are required to disclose their financial statements and business conditions.
Some types of alternative investments are less transparent than others – for example, hedge funds may not be required to disclose their full strategies or holdings.
Due to the unique characteristics of some alternative investments, TAA portfolio allocations may be less frequent than more traditional investments.
TAA Considerations for Traditional and Alternative Investments
Frequent changes to asset allocations can result in higher transaction costs. This can be especially true in less liquid alternative markets.
Active reallocation can have significant tax consequences, especially if realized gains are generated frequently.
While TAA aims to enhance returns or reduce risks, there can be no guarantee of success. Sometimes, the tactical investments play out differently than expected by an OCIO.
Why Consider an OCIO?
Working with an OCIO can provide a cost-effective way to access quality investment and risk management for a fraction of the cost of a full-time CIO. Plus, you get an experienced team of specialists for the cost of a part-time CIO. This lets you focus on current clients and the addition of new clients while ensuring a professional is managing your client’s assets.
The traditional asset management model requires RIAs or IARs to handle the day-to-day money management tasks, such as research, trading, compliance, operations, etc., which takes away from the time they could spend helping clients build a successful financial future. By outsourcing these duties to an OCIO, RIAs or IARs can free up time for client relationships while still providing quality investment services.
Additionally, working with an OCIO provides access to specialized skills that may only be available at some bigger firms. This means more sophisticated portfolio construction and tailored strategies based on individual client needs that may have not been available if the investor uses a single advisor or firm.
Get to Know Cornerstone Portfolio Research
When you partner with the Cornerstone team, your professionals are instantly equipped with a personal CIO and CFA® Charterholder without any equity commitments.
We operate as contractors, saving you the hefty cost of a full-time CIO’s salary, taxes, bonuses, and benefits. Integration into your succession plan? Consider it done!
We respect and build on your current investment strategy, working with existing client holdings to foster continuity and uninterrupted growth. From daily trades and preparation for meetings to report generation, we manage it all, creating the time you need to steer your firm’s direction and enabling you to focus on what you do best – planning your clients’ financial futures.
All of our recommendations are tax-efficient and in line with your investment philosophy. We focus on gradual, consistent improvements rather than abrupt, excessive change.
Our portfolio management services come at a flat basis point fee across your entire portfolio, ranging between 5 to 20 bps for comprehensive research and management. Most partners find the 5 to 10 bps range fitting. With adaptable support alternatives, we craft a package that meets your budgetary requirements.
We respect your way of doing business. Unlike many large outsourcing companies, we don’t mandate immediate or major changes in your operations. To learn more about our OCIO services, connect with us.