GTAA: An overlooked driver of long-term performance

Sudden swings in market volatility and changing correlations between asset classes can lead us to rethink the construction of even the most thoughtful long-term strategic asset allocation. Investors can underestimate both the risk and opportunity these shorter-term fluctuations represent for their portfolios. By incorporating strategies that can operate on these shorter, more tactical time horizons, investors can add further diversification to long-term oriented portfolios.

What is GTAA?

Global tactical asset allocation (“GTAA”) strategies serve as a counterpoint to long-term strategic asset allocations (“SAAs”), while still respecting targeted investment objectives. The breadth of these strategies adds opportunistic tilting away from SAAs, with the aim of capitalizing on shorter-term opportunities that may arise from market forces such as structural impediments, information asymmetries and innate human behaviors.

The key feature of a successful GTAA strategy is maintaining a low correlation with other sources of return, both the broad asset classes in client SAAs as well as common factor returns and security selection alpha sources. If correlations with other portfolio return drivers remain muted, then this can be a highly additive contributor to whole portfolio results.

What prompts organizations to consider GTAA?

As forward-looking expected returns and yields have compressed, many clients have shifted their asset allocations on a strategic basis into assets traditionally thought of as “riskier.”¹ As expectations for improved outcomes in return or yield increase, they may bring with them unintended combinations of lower liquidity in stressed environments. GTAA strategies offer the potential to mitigate these risks through a combination of improved diversification benefits and enhanced risk-adjusted returns investing in liquid assets across asset classes.

Most SAA processes rely on very long-term capital market assumptions around single asset returns and cross-asset correlations. We acknowledge the difficulty inherent in forecasting future returns. While capital market assumption analysis is valuable in assisting investors in the evaluation of more aggressive or conservative forecasts, this also highlights the wide range of potential outcomes, which can undermine our confidence in achieving desired long-term outcomes. GTAA is not a strategy that operates in isolation, but rather one that complements all the other drivers of whole portfolio risk and return.

Episodic bouts of market volatility and the effect of geopolitical news on markets are seemingly more impactful as they punctuate an otherwise extended period of low volatility over the past decade. As a result, fiduciaries increasingly may question where we are in the cycle and how asset valuations stack up. In the post-pandemic period, we believe geopolitical stresses that existed before the crisis are likely to accelerate. Some clients are searching for immediate actions that can be taken in their portfolios around redeploying capital or adjusting exposures. GTAA strategies offer a flexible and nimble multi-asset solution that can capitalize on these exact market dynamics.

What creates the opportunity for GTAA to make money?

Financial markets are never at precise equilibrium due to the many cross currents of structural and behavioral forces. In our experience, a few persistent features of markets contribute to macro pricing inefficiencies which create opportunities for skilled GTAA investors²:

• Market segmentation and structural impediments
• Information and processing asymmetries
• Non-profit-motivated players

This combination of market structure, asymmetrical information and different incentives across market participants leads to the variety of opportunities that GTAA investors seek to capitalize upon. Implemented in concert with traditional beta and alpha sources, a GTAA investment framework is set apart by its uncorrelated return profile, financial instrument breadth, and forward-looking application of alternative data. The outcome of this approach is a portfolio constructed from an adaptive opportunity set, which continually seeks to maximize potential return, mitigates unintended risks, and acts as a principal driver of long-term performance.

Key Takeaways