One of the most important decisions in asset management is the allocation between equities and fixed-income securities. This allocation is based on the specific situation of the investor.
In certain cases, the institutional investor has internal investment rules that specify the asset classes in which assets may be invested – the strategic asset allocation. Many investors choose to give the asset manager a mandate to act within specified limits to the best of his or her ability. We call this tactical allocation.
Tactical asset allocation aims to maximise the return on the portfolio through proper positioning in relation to the asset class that in the short to medium term generates the best return. Historicly equities have generated better returns than fixed-income securities over the long term. However, the stock market can be overvalued during certain periods, resulting in sharply falling prices. During these periods, it is of course the objective of all investors to do their best to avoid exposure to the stock market, and vice versa when the stock market is performing well.
Of course it is impossible to have prior knowledge of market trends in the short term.