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DRS vs. Tactical Asset Allocation

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Strategy Comparison Series

At Swan Glob­al Invest­ments, we are fre­quent­ly asked “In which cat­e­go­ry do you belong?” or “Who are your com­peti­tors?” We believe that the Defined Risk Strat­e­gy is a rather unique solu­tion, and no one is cur­rent­ly doing what we are doing. The DRS doesn’t fit nice­ly into a pre­de­fined box.

That said, it is inevitable that the Defined Risk Strat­e­gy gets com­pared against oth­er man­aged prod­ucts. This post will be the first in a series where we com­pare and con­trast the DRS against oth­er types of invest­ment strate­gies. Because we are most fre­quent­ly com­pared to tac­ti­cal asset allo­ca­tion or mar­ket-tim­ing strate­gies, this is where we will start.

The one and only thing that the DRS has in com­mon with tac­ti­cal asset allo­ca­tors is an aver­sion to down mar­kets. Pas­sive strate­gies or stock-pick­ers who hew close­ly to a bench­mark will track their bench­marks on both the upside and the down­side. If the mar­ket has a major sell-off, stock pick­ers typ­i­cal­ly offer lit­tle down­side pro­tec­tion, and pas­sive strate­gies offer none. Both the Defined Risk Strat­e­gy and most tac­ti­cal asset allo­ca­tors attempt to active­ly min­i­mize expo­sure to down mar­kets.

Zephyr drawdown comparison DRS vs Tactical vs S&P 500 index - Swan Blog

Source: StyleAd­vis­er

How­ev­er, the man­ner in which tac­ti­cal asset allo­ca­tors (TAA) and the DRS attempts to accom­plish this goal couldn’t be more dif­fer­ent.

The typ­i­cal tac­ti­cal asset allocator’s val­ue propo­si­tion is based upon mar­ket tim­ing. A TAA strat­e­gy will typ­i­cal­ly make sig­nif­i­cant, top-down changes to their strategy’s asset allo­ca­tion based upon chang­ing fore­casts on the mar­ket­place or some sort of indi­ca­tor based on past his­tor­i­cal occur­rences.

A sim­pli­fied descrip­tion of a tac­ti­cal asset allocator’s phi­los­o­phy might be, “The best way to not lose mon­ey is to avoid the asset class­es with the worst per­for­mance.” More­over, the oppor­tu­ni­ty set of a tac­ti­cal asset allo­ca­tion strat­e­gy is usu­al­ly very broad. Unlike a large-cap stock pick­er that can only choose from a field of 500 or 1,000 stocks, the oppor­tu­ni­ty set for a TAA strat­e­gy is much broad­er.

Periodic Table of Asset Class Annual Performance - Swan Blog


In the­o­ry, this is a good way to min­i­mize loss­es. As the table above illus­trates, there can be wide dis­per­sions between the best and worst per­form­ing asset class­es. With a wide-open man­date, a tac­ti­cal asset allo­ca­tor could have many more asset class­es to choose from.

How­ev­er, the whole trick to being a suc­cess­ful tac­ti­cal asset allo­ca­tor is being in the right place at the right time. It’s just as easy to be caught out on the wrong side of the tracks. If a TAA gets their mar­ket calls wrong, the poten­tial for under­per­for­mance is every bit as great as the poten­tial for out­per­for­mance. The invest­ment land­scape is lit­tered with TAA strate­gies whose “Midas Touch” even­tu­al­ly desert­ed them, leav­ing them well behind the mar­ket. I like to sum up the expe­ri­ence of TAA strate­gies as “live by the sword, die by the sword.”


Dif­fer­ent Approach­es to Down­side and Upside

At Swan Glob­al Invest­ments we believe it is very dif­fi­cult if not impos­si­ble to always be one step ahead of the mar­ket, as required by a mar­ket-tim­ing strat­e­gy. It’s inevitable that any giv­en TAA strat­e­gy will have some of their mar­ket tim­ing calls work out in their favor and some will go against them, but we do not believe mar­ket-tim­ing to be a sus­tain­able long-term strat­e­gy.

Swan’s invest­ment mot­to is “Always invest­ed, always hedged.” We do not pro­fess to know when mar­kets will go up or go down. We remain always invest­ed with a buy-and-hold posi­tion in a giv­en mar­ket, in order to cap­ture as much of the upside as we can. How­ev­er, we nev­er know when steep sell-offs might occur, so we always main­tain a hedge to pro­tect our assets against bear mar­kets. We always main­tain this hedged equi­ty approach. I like to say it doesn’t mat­ter if the mar­kets are down 50% like they were dur­ing the Finan­cial Cri­sis or if the mar­ket is in an eighth year of a bull mar­ket- the Defined Risk Strat­e­gy is always doing the same thing.

DRS. Vs Tactical Track Records  — Which is More Replicable and Reliable?

Because Swan fol­lows a very sys­tem­at­ic approach, we can esti­mate with a fair degree of accu­ra­cy where our returns might fall in any giv­en year, some­thing that mar­ket-timers can­not do. The chart below is one we use fre­quent­ly at Swan.

  • The diag­o­nal red line is the prof­it-loss dia­gram for the S&P 500.
  • The curved gold line rep­re­sents the return pro­file of our hedged equi­ty posi­tion, that is, our buy-and-hold posi­tion in the mar­ket com­bined with the pro­tec­tive ele­ments of our hedge.
  • The gold line lags the S&P 500 in up mar­kets but is still upward slop­ing. In down mar­kets, the hedged equi­ty position’s loss­es flat­ten out as the S&P 500 con­tin­ues to drop.
  • The blue area around the gold curve is the antic­i­pat­ed impact of over­lay­ing Swan’s short-term pre­mi­um col­lec­tion trades over the hedged equi­ty posi­tion.

It is our expec­ta­tion that future returns of the DRS will be with­in or above the blue shad­ed area. In 17 of 18 years, they have been.


Source: Swan Glob­al Invest­ments



TAA strate­gies, on the oth­er hand, have a high degree of uncer­tain­ty asso­ci­at­ed with them. In the graph below, we see a uni­verse com­par­i­son on a year-by-year basis show­ing the range of returns from best to worst per­form­ers. The data set used here is Morningstar’s Tac­ti­cal Asset Allo­ca­tion cat­e­go­ry.  We can see that in any giv­en year the range sep­a­rat­ing the best per­form­ers from the worst can be quite wide. The per­for­mance dis­per­sions you see here are much larg­er than the plain vanil­la asset class­es.

Morningstar Peer Performance Chart - Tactical Asset Allocation vs Russell 1000TR | Swan Blog

Wide per­for­mance dis­per­sions shouldn’t be a sur­prise, giv­en the fact that the asset allo­ca­tions are all over the map.

In this last graph, we see the range of asset allo­ca­tions with­in the TAA cat­e­go­ry. TAA funds can take big bets, and they do. Across the cat­e­go­ry, we see expo­sure to U.S. equi­ty range from 0% to 85%. Cash ranges from 0% to more than 60%. U.S. bonds can be as low as noth­ing or as much as 50% of a port­fo­lio.

Morningstar Peer Performance Chart - Tactical Asset Allocation Funds vs Open End Funds | Swan Blog

Final­ly, tac­ti­cal asset allo­ca­tion strate­gies tend to have high­er turnover ratios and are thus less tax effi­cient. Their whole val­ue propo­si­tion involves the active buy­ing and sell­ing of asset expo­sure in order to out­per­form the mar­ket. As turnover and tax effi­cien­cy are close­ly relat­ed, this is an addi­tion­al con­cern for TAA strate­gies.

That said, it is real­ly the val­ue propo­si­tion of TAA strate­gies that Swan does not share. We believe it is too dif­fi­cult to con­sis­tent­ly time the mar­ket and that mar­ket-tim­ing should not be the basis for a long-term strat­e­gy. When TAA bets go wrong, they can go very wrong.

That is why the Swan Defined Risk Strat­e­gy sticks to the mot­to:  “Always Invest­ed, Always Hedged.”


Click to learn more about Swan’s Defined Risk invest­ment approach and for more details regard­ing his­tor­i­cal per­for­mance.

For more infor­ma­tion please con­tact Swan at 970–382-8901.



Marc Odo, Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Director of Investment Solutions - Swan Global InvestmentsAbout the author: Marc Odo, CFA®, CAIA®, CIPM®, CFP®, Client Port­fo­lio Man­ag­er, is respon­si­ble for help­ing clients and prospects gain a detailed under­stand­ing of Swan’s Defined Risk Strat­e­gy, includ­ing how it fits into an over­all invest­ment strat­e­gy. For­mer­ly Marc was the Direc­tor of Research for 11 years at Zephyr Asso­ciates.



Impor­tant Dis­clo­sures:

Swan Glob­al Invest­ments, LLC is a SEC reg­is­tered Invest­ment Advi­sor that spe­cial­izes in man­ag­ing mon­ey using the pro­pri­etary Defined Risk Strat­e­gy (“DRS”). SEC reg­is­tra­tion does not denote any spe­cial train­ing or qual­i­fi­ca­tion con­ferred by the SEC. Swan offers and man­ages the DRS for investors includ­ing indi­vid­u­als, insti­tu­tions and oth­er invest­ment advi­sor firms. Any his­tor­i­cal num­bers, awards and recog­ni­tions pre­sent­ed are based on the per­for­mance of a (GIPS®) com­pos­ite, Swan’s DRS Select Com­pos­ite, which includes non­qual­i­fied dis­cre­tionary accounts invest­ed in since incep­tion, July 1997, and are net of fees and expens­es. Swan claims com­pli­ance with the Glob­al Invest­ment Per­for­mance Stan­dards (GIPS®). All data used here­in; includ­ing the sta­tis­ti­cal infor­ma­tion, ver­i­fi­ca­tion and per­for­mance reports are avail­able upon request. The S&P 500 Index is a mar­ket cap weight­ed index of 500 wide­ly held stocks often used as a proxy for the over­all U.S. equi­ty mar­ket. Index­es are unman­aged and have no fees or expens­es. An invest­ment can­not be made direct­ly in an index. Swan’s invest­ments may con­sist of secu­ri­ties which vary sig­nif­i­cant­ly from those in the bench­mark index­es list­ed above and per­for­mance cal­cu­la­tion meth­ods may not be entire­ly com­pa­ra­ble. Accord­ing­ly, com­par­ing results shown to those of such index­es may be of lim­it­ed use. The adviser’s depen­dence on its DRS process and judg­ments about the attrac­tive­ness, val­ue and poten­tial appre­ci­a­tion of par­tic­u­lar ETFs and options in which the advis­er invests or writes may prove to be incor­rect and may not pro­duce the desired results. There is no guar­an­tee any invest­ment or the DRS will meet its objec­tives. All invest­ments involve the risk of poten­tial invest­ment loss­es as well as the poten­tial for invest­ment gains.  This analy­sis is not a guar­an­tee or indi­ca­tion of future per­for­mance. Pri­or per­for­mance is not a guar­an­tee of future results and there can be no assur­ance, and investors should not assume, that future per­for­mance will be com­pa­ra­ble to past per­for­mance. All invest­ment strate­gies have the poten­tial for prof­it or loss. Fur­ther infor­ma­tion is avail­able upon request by con­tact­ing the com­pa­ny direct­ly at 970.382.8901 or vis­it 214-SGI-082916

By |2018-10-02T11:30:55+00:00September 13th, 2016|Blog|Comments Off on DRS vs. Tactical Asset Allocation -Strategy Comparison Series

About the Author:

As Director of Investment Solutions, Marc is responsible for helping clients and prospects gain a detailed understanding of Swan’s Defined Risk Strategy, including how it fits into an overall investment strategy. Formerly Marc was the Director of Research for 11 years at Zephyr Associates.