A Decade of Tactical Opportunities

In a world where traditional sources of return can be challenged by changing market regimes, the Tactical Opportunities Fund was designed to provide investors with a flexible and diversified source of alpha. As we mark its 10-year anniversary, the strategy continues to draw on the Global Tactical Asset Allocation (GTAA) team's macro expertise to identify opportunities across markets and generate results for clients.

What was the genesis of the Tactical Opportunities strategy in 2016?

The GTAA team assembled in 2008 to deliver alpha through top-down, asset allocation to large institutions via separate accounts. A belief of the team – both then and now – is that markets are mostly efficient, but that a combination of behavioral biases and structural barriers can create inefficiencies that create investment opportunities. To capture those opportunities, we’ve sought to continuously improve our measurement of macro fundamentals (growth, inflation and policy) while remaining vigilant about what’s priced in markets (equities, bonds, and currencies) to generate durable alpha for clients on a tactical, 1-2 quarter investment horizon.

In 2016, the team launched the Tactical Opportunities Fund as its first commingled “cash+” offering. It was designed to bring together the superset of the team’s active macro insights – both systematic and discretionary – to deliver alpha above a cash benchmark. A standalone fund allowed us to create scale in our institutional, separate account business and also opened access to a broader range of investors. Ten years later, the Tactical Opportunities franchise has grown to $8 billion in assets globally and plays an important role in the portfolios of wealth and institutional clients.

The Tactical Opportunities Fund has delivered uncorrelated alpha over cash since inception

How has the macro investment backdrop evolved over the last decade?

We launched the Tactical Opportunities strategy in the macro doldrums. 2016 was squarely in the middle of a decade of fiscal austerity, monetary overreach, and corporate underinvestment. Against this volatility-suppressed backdrop, we needed to fight for every 5-10bp shift in central bank expectations, navigate stock & bond markets that were historically correlated across countries, and manage with a cash benchmark yielding close to zero. Markets during our first five years of running the fund were characterized by:

1. Central bank-induced volatility suppression – persistent undershoots in consumer price inflation emboldened monetary activism that resulted in ballooning central bank balance sheets and persistently negative stock-bond correlations.¹
2. Broad-based asset price appreciation with low asset price dispersion – rising global integration and benign geopolitics generated a relatively flat securities market line, which meant that portfolio returns were relatively independent of asset allocation decisions.
3. Low cash rates – low cash yields mechanically lowered the benchmark returns for liquid alternatives, but they also raised the opportunity cost for investors to be patient during overvalued moments in directional stock and bond markets.

The pandemic was a generational global event that shook loose the stagnant investment backdrop of the 2010s and blew wind back into macro investment sails. The last five years have exemplified this resurrected macro investment opportunity set:

1. Fiscal and industrial policy have triggered multi-year cycles of economic divergence across countries while also creating bouts of government bond supply jitters.
2. Entrenched, above-target inflation has led to higher policy rates, balance sheet normalization, and greater uncertainty over the reaction function of central banks.
3. Geopolitical fragmentation and supply chain rewiring have generated asset price dispersion as countries jostle for AI supremacy, resurrect defense spending, and corporations monetize ballooning fiscal deficits.

A normalization of cross-country dispersion has resuscitated the macro opportunity set

Throughout this decade of two halves, our philosophy has remained consistent: continuously innovate and evolve to identify alpha investment opportunities at the intersection of the macro environment and what’s priced in markets.

Why do markets become inefficient, and why do macro mispricings persist?

The graphic below organizes some of the catalysts that we see driving macro mispricings along with some of the barriers that allow them to persist over an investible horizon.

Catalysts for investible mispricings across asset classes and across countries

Market prices are set by humans and, as the extensive behavioral finance literature documents, humans are prone to biases.² Over the years, we’ve often observed market participants, policymakers, and brokers anchoring, misinterpreting, and underreacting to developments in macro fundamentals. Some examples include local and global data innovations being conflated; nominal and real data being mixed up; and narratives across asset classes, countries, and policy regimes getting stale. These behavioral biases create gaps between what macro fundamentals imply and market prices; so long as humans set supply and demand across financial markets we expect our biases to remain a source of mispricings.

Structural and institutional barriers further explain why market mispricing can persist, particularly across countries. We list some of the hurdles to speedy market efficiency on the right above. Financial markets are highly regulated and subject to numerous, country-specific rules that often prevent capital from flowing frictionlessly across borders. There are also many financial market participants that are not profit-oriented, notably central banks and indexers, and their flows can temporarily determine prices independent of macro developments. A more geopolitically fragmented world is likely to increase these capital market frictions, and more heterogenous policy and regulation could mean that asset prices take even longer to equilibrate across regions.

What data do you use, and how has it evolved?

We will use any and all available data that might help us to better understand the state of economy or market pricing. We use traditional and non-traditional data sources, structured and unstructured data, and conversations with colleagues throughout the firm to try to identify insights that can lead to investment opportunities. We are always innovating our approaches, and as the tools (including machine learning and large language models) have evolved so too have our capabilities and investment use cases.

The visual below shows one measure of how this continuous innovation has made its way into portfolios. As the market environment has evolved the sources of mispricing have shifted and we’ve sought out new insights and signals to capture those new sources of alpha. For example, in the aftermath of the pandemic we have been particularly focused on fiscal policy research in response to the growing market relevance of government spending, industrial policy, and bond supply. Going forward, our insights will continue to evolve alongside the shifts in market structure, data availability, and analytical tools.

Research and signal innovation helps to maintain our edge as markets evolve

What’s the role of the strategy in client portfolios?

At launch, we intended for Tactical Opportunities to serve as a source of differentiated alpha in an accessible, daily liquid structure. Delivered results have been consistent with that objective. The majority of alpha has come from cross-country, relative value exposures while the beta to traditional stocks and bonds has remained consistently low. That combination has allowed the fund to act as a source of both growth and ballast within a multi-asset portfolio – a role that has become even more relevant in today’s environment.

The expanded client base of Tactical Opportunities over the last decade demonstrates the value that global investors see in this type of diversifying macro strategy within their portfolios. Our continuous interactions with clients help to keep us sharp in an ever-shifting macro environment and we are grateful for the trust you’ve placed in our investment process. As we mark this ten-year anniversary, we’d like to thank clients for their partnership as we seek to continue delivering differentiated macro alpha with disciplined risk management.

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life sub-accounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10 of products in each product category receive 5 stars, the next 22.5 receive 4 stars, the next 35 receive 3 stars, the next 22.5 receive 2 stars, and the bottom 10 receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100 three-year rating for 36-59 months of total returns, 60 five-year rating/40 three-year rating for 60-119 months of total returns, and 50 10-year rating/30 five-year rating/20 three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance does not guarantee future results.

To obtain more information on the funds, including the Morningstar time period ratings and standardized average annual total returns as of the most recent calendar quarter and current month-end, please click on the fund product profile page above.