A growing theme in the investment professional literature revolves around the idea of strategic vs. tactical management of portfolios.
Strategic assets, or even individual positions, are generally those that are included at the core of the investment mix regardless of the market climate or economic cycle. They are a buy-and-hold component because they have strong prospects for long-term growth. It is even better when they are purchased at an attractive price.
In Berkshire Hathaway’s annual report, Warren Buffett provides a good explanation of what a strategic asset is, without labeling it as such. In writing about shares of companies that Berkshire owns such as Coca-Cola and American Express, Buffett explains his perspective:
In these businesses, “we measure our success by the long-term progress of the companies rather than by the month-to-month movements of their stocks. In fact, we would not care in the least if several years went by in which there was no trading, or quotation of prices, in the stocks of those companies. If we have good long-term expectations, short-term price changes are meaningless for us except to the extent they offer us an opportunity to increase our ownership at an attractive price.”
This philosophy has worked very well for Buffett and Berkshire Hathaway for 50+ years. It might continue to be successful for another 50, though Buffett himself writes that Berkshire’s edge is not what it once was. In today’s evolving global economy, however, we believe it has become more important to have a portion of the portfolio managed with a more tactical approach. This means evaluating specific market segments for their opportunity, or disadvantage, more continuously. There are points when it becomes clear that certain types of assets are either in or out of favor with the market. The difficulty is timing the entry and exit points of those investments and determining how much of the portfolio to expose to tactical shifts.
This is tricky business and the reason why we don’t employ fully tactical portfolio management – something that some investment managers believe in.
We don’t believe in rotating sectors of the stock market in an attempt to capture stock price movements. We don’t follow momentum signals or other technical indicators of trading activity meant to identify market direction, particularly short-term movement. Our tactical approach is more thematic and based on fairly minor weight shifts in a portfolio.
For example, bond market conditions over the past six months have influenced two tactical decisions. We’ve tactically increased clients’ exposure to floating rate bank loans – which are expected to fare better in rising interest rate environments. We’ve also increased use of strategic income mutual funds which give the money manager flexibility to shift emphasis. Mostly we prefer this approach because the general shift has been away from U.S. Treasury or Agency bonds and more toward international bonds – where interest rates are higher and government balance sheets are in better shape than in the U.S. – and corporate bonds.
Other tactical emphasis, depending on the investor’s objective, may include the weight of commodities investments, dividend-paying stocks over growth companies, or the weight given to small companies vs. large.
We believe these moves, in moderation, add value over time by reducing risk. We don’t dramatically change the core elements of the portfolio, we just emphasize tactical shifts involving perhaps 10-15% of it. We think of this as using a tactical overlay on a strategic core.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA