Tactical Asset Allocation: History, Theory & Practice

1. Tactical Asset Allocation:History, Theory & Practice Brian Schreiner Schreiner Capital Management, Inc. Exton, PA - www.scminvest.com June 26, 2014

2. Two Types of Investment Strategies: › Passive Investing or… Buy-and-Hold or… Strategic Asset Allocation › Active Investing or… Tactical Asset Allocation Introduction

3. › Background - What is Tactical Asset Allocation (TAA)? - How is TAA different from Strategic Asset Allocation (SAA)? › History - TAA from the Old Testament to Today - The evolution of TAA › Theory - Why has TAA become more popular in recent decades? - What are the potential benefits and risks of TAA? › Practice - What are the different approaches, objectives and benchmarks? - Focus on trend following › Q & A Agenda

4. › Definitions | What is TAA? “Tactical asset allocation (TAA) broadly refers to active strategies which seek to enhance performance by opportunistically shifting the asset mix of a portfolio in response to the changing patterns of reward available in the capital markets.” - Arnott& Fabozzi, Asset Allocation: A Handbook of Portfolio Policies, Strategies & Tactics, 1998 “Tactical asset allocation (TAA) actively adjusts a portfolio’s strategic asset allocation (SAA) based on short-term market forecasts [or trends]. Its objective is to systematically exploit inefficiencies or temporary imbalances in equilibrium values among different asset or sub-asset classes.” - Vanguard Research, 2010: Background

5. › How is Tactical Asset Allocation (TAA) different from Strategic Asset Allocation (SAA)? Background

6. In the beginning…there were “Speculators” 1011 BC Diversification: King Solomon FAST FORWARD 2,645 Years… 1634-1637 Market Trends: Tulip Mania in Holland 1890s Professional Money Management: The Robber Barons 1899-1902 Trend Following: Charles H. Dow 1934 Value Investing: Benjamin Graham “Security Analysis” 1930s, 40s, 50s …and beyond: Published works on many types of investing History

7. 1976 Tactical Asset Allocation: William Fouse of Wells Fargo 1980 The Information Age begins: Business Computers & PCs 1981 US stocks decline 27% 1987 Global stock markets crash 1991 The Internet: A Global Network (data as we know it) 1990s Greatest bull market in US history - TAA underperforms 2000 Tech Bubble peak (March 10) 2007-08Financial Crisis History

8. › Why use TAA? • Return expectations from stocks and bonds are very low over next decade. • - Investors are seeking more attractive returns. • Stock and bonds are expensive - priced near all-time highs. • - Investors want to limit exposure to risky assets. • 3. Volatility has been low and will likely increase. • - SAA is highly volatile - investors can reduce volatility through TAA Theory

9. › Who is using TAA? Everyone… - Institutions - Endowments - Pension Funds - Professionals/Family Offices - Individual Investors Theory

10. › Percentage of RIAs who describe their overall investment approach as: Theory 2007 2009 2011 2013 Strategic 50% 48% 65% 65% Tactical 35% 39% 27% 22% Other 15% 19% 8%13% Source: AdvisorBenchmarking.com 2013

11. Theory

12. Theory: Return Expectations are Very Low Expected return from a 60/40 stock/bond portfolio is 2.3% over the next decade.

13. STOCKS Theory: Stocks & Bonds Near All-Time Highs BONDS

14. CBOE Volatility Index (VIX) Theory: Stock Market Volatility May Rise

15. Theory: Stocks are Expensive by Historical Standards

16. Theory: Opportunities Exist for Active Investors Source: CrestmontResearch.com

17. Theory: Opportunities Exist for Active Investors Source: Schreiner Capital Management, Inc. & Yahoo! Finance

18. › Benchmark: TAA strategies are usually measured against a passive benchmark. › Objective: Better-than-benchmark returns and/or Less-than-benchmark risk › Approach: 1. Subjective 2. Quantitative 3. Combination of the two Practice

19. › Commonly Used Quantitative TAA Strategies • The Fed Model Signals (Fundamental) • Compares stock earning yields to bond yields to determine relative strength • Macroeconomic or Business-Cycle Signals (Fundamental) • Measures variations in market risk premiums and firms’ earnings • Fundamental Valuation Signals (Fundamental) • Bottom-up (firm-valuation based on dividend yield, book/market ratio, PE ratio) and/or Top-down (dividend discount model) valuation metrics. • Trend Following Signals (Technical) • Technical analysis of market data (mostly price) to identify momentum • Sentiment (Technical) • A contrarian approach that looks for signs of extremes (ie: consumer/investor confidence, margin borrowing) Practice

20. › Primary Types of Trend Following: 1. Trend Line Analysis /Charting 2. Moving Average Systems 3. Relative Strength Indicators Practice

21. › Trend Following Using Trend Line Analysis/Charting Support Resistance Channels Bands Flags Candlesticks Rates of Change Oscillators Clouds Heads Shoulders …it’s endless Practice

22. › Trend Following Using Moving Average Systems Practice Source: Schreiner Capital Management, Inc. For financial professional use only. This is a hypothetical example for illustration purposes only.

23. › Trend Following Using Relative Strength Indicators Relative Strength indicators measures the change and direction of price movements. Practice Relative Strength = % change Industry Sector Fund ÷ % change in Benchmark

24. › Trend Following Using Relative Strength Indicators Practice

25. › Trend Following Using Relative Strength Indicators Practice

26. › Primary Considerations for Investors Investment Profile - Investment Personality - Investment Goals - Portfolio Profile - Risk Tolerance - Time Horizon Due Diligence - Investment Manager(s) - Investment Vehicle - Investment Philosophy - Investment Process Implementation - Execution Costs/Fees - Tax Implications - Opportunity Costs Practice

27. Questions? Tactical Asset Allocation: History, Theory and Practice Brian Schreiner Schreiner Capital Management, Inc. Exton, PA 610-524-7310 bschreiner@scminvest.com

28. Arnott, Robert and Fabozzi. Asset Allocation: A Handbook of Portfolio Policies, Strategies & Tactics. Probus Publishing Co., 1998. Faber, Mebane T. “A Quantitative Approach to Tactical Asset Allocation.” The Journal of Wealth Management. Spring 2007. Working Paper, Updated February 2009. Electronic copy available at: http://ssrn.com/abstract=962461. Ivanova, Maya. AdvisorBenchmarking Annual Research Study. AdvisorBenchmarking.com. 2008-10. Loeb, Gerald M. The Battle for Investment Survival. New York: John Wiley & Sons, Inc., 1935. MacKay, Charles LL.D. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. Mansfield Centre, CT: Martino Publishing, 2009. (First published: 1852) Mallik, Gaurav. “Mitigating Equity Market Correlations Through Stock Selection.” SSgA Capital Insights. August, 2009. Ostgaard, Stig. “On the Nature and Origins of Trend-Following.” December, 2008. www.lastatlantis.com. Stockton, Kimberly A. and Shtekham, Anatoly. “A Primer on Tactical Asset Allocation Strategy Evaluation.” Vanguard Research. 2010. Shiller, Robert J. Irrational Exuberance. Second Edition. Princeton University Press: 2005. www.irrationalexuberance.com Wai, Lee. “Advanced Theory and Methodology of Tactical Asset Allocation.” Duke University. January 2000. Sources