why a portfolio manager might have a tactical allocation that is different from the strategic allocation...

why a portfolio manager might have a tactical allocation that is different from the strategic allocation laid out in the IPS

Expert Solution

Under investor policy statement (IPS); the strategic asset allocation is done by allocating different portions of fund to different asset classes like stocks, bonds, commodities etc. based on expected return, time horizon, liquidity requirements, taxes, and risk tolerance of investors. A portfolio manager might have a tactical allocation that is different from the strategic allocation laid out in the IPS to take the advantage of short term market anomalies. The portfolio manager can take advantage of irregularities and mispricing in the financial market to outperform the market by actively managing the tactical allocation for short term that could be different from strategic allocation then returning to strategic allocation for long term. For example; suppose strategic allocation for stocks is 50% but portfolio manager thinks that the stocks market is going to outperform in next 6 months, in that case the portfolio manager could allocate 60% to stocks for next 6 months to take advantage of favorable market conditions in stocks.

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