What do you think about the Ivy Portfolio and other forms of Global Tactical Asset Allocation?
I don't know the details of the Ivy Portfolio but in general I have a very low opinion of tactical asset allocation, global or otherwise. It's just a fancy way of saying that the fund manager can do whatever he wants. Why would you want to give anybody a free pass to play with your capital like that?
If there was decent evidence that some fund managers are truly skilled and, more importantly, if there was a good way of identifying which ones will be skilled in the future, then I'd be all for it. I'd find my skilled fund manager and let him run the portfolio as he pleases. As long as he delivers alpha that exceeds management fee plus frictional costs of active management it will be worth it.
Unfortunately, there is next to no evidence of skill among fund managers or financial advisors. Plenty outperform, but since there are tens of thousands of them it is statistically expected for thousands to outperform. Let's be (very) optimistic and suppose there really are some that are skilled enough to generate alpha big enough to overcome the management free plus expenses. If these managers were well known, then their funds would either be (a) already closed to new investors or (b) so big that the manager's skill would not be enough to overcome the fact that the size of his trades overwhelms liquidity available in the market, thus moving the price against him. And if these managers were not well known, then (a) how can you be sure that they are skilled -- since they must not have much history or else they would be better known -- and (b) what are the chances of you coming across them ahead of millions of other investors?
In order for you to believe that your manager can provide alpha that exceeds the extra costs you have to assume that:
- A skilled manager exists.
- This skilled manager chooses to work in the relatively unrewarding and unprestigious area of mutual funds that are open to the general public instead of the much more exclusive and lucrative hedge funds.
- This skilled manager is generally unknown to other investors -- probably because he doesn't have much history.
- You have come across this skilled manager and somehow recognized his skill.
Alternatively, it may be just that your manager is:
- Same as vast majority of manager in that he claims to be skilled, is able to string together intelligent-sounding arguments for whatever, delivers before-costs returns that are randomly distributed around the market mean, and costs you around 2% annually in expenses and taxes.
Which do you think is more likely?