A growing number of Australian institutional investors is weaving tactical asset allocation into existing approaches, often within dynamic asset allocation programs. This trend reflects better data, stronger governance frameworks, and regulatory constraints, but above all a recognition that no single lens is enough to manage portfolios in today’s world, Michael Sommers writes.
Tactical asset allocation, or TAA, is starting to play a larger role in how super funds manage risk and opportunity. While dynamic asset allocation (DAA) has been a staple of portfolio construction for years, a shift is underway. In a more volatile and faster-moving market environment, funds are finding that adding TAA thinking to their toolkit helps them respond more quickly, act on a wider set of signals, and manage short-term pressures without abandoning their long-term beliefs.
DAA programs were traditionally built around medium-term valuation signals. Many funds adopted quarterly processes, often guided by consultant input, to implement modest tilts away from the strategic asset allocation. Over time, for some funds, these frameworks broadened to include sentiment, positioning, liquidity and macroeconomic policy, recognising that valuation alone does not capture all relevant risks and opportunities. Crucially, these additional factors can moderate a pure valuation signal, helping to avoid being persistently underweight in strongly rising markets.
Funds operate in an environment shaped by daily peer comparisons, Your Future, Your Super constraints and geopolitical risk that can shift positioning quickly, making it harder to rely on medium-horizon perspectives alone
These programs were designed to be patient and disciplined, and they remain valuable. But in recent years, valuation-heavy views have been tested as equity markets rose despite expensive-looking fundamentals. Some programs remained underweight for extended periods. In other cases, the broader signals helped temper the underweight stance, although medium-term signals can also take time to deliver.
That experience has prompted reflection: the lesson is not that any one lens is wrong, but that funds benefit from combining perspectives that move at different speeds. Medium-term views remain important, yet can take time to play out. At the same time, funds operate in an environment shaped by daily peer comparisons, Your Future, Your Super (YFYS) constraints and geopolitical risk that can shift positioning quickly, making it harder to rely on medium-horizon perspectives alone.
At the same time, markets themselves have become more complex and reactive. Information flows faster. Sentiment can swing on a tweet, a policy speech or a data surprise. In this environment, shorter-term indicators such as momentum, flows, positioning, carry and technicals can provide early warnings or opportunities.
TAA is a way to incorporate these signals into portfolio decisions, not just for alpha, but also for liquidity planning, sequencing risk and benchmark alignment. It is not a replacement for DAA, nor the only way to act quickly. Well-governed DAA programs can also adjust positions rapidly in stressed markets. The difference is that TAA makes shorter-horizon decisions a systematic and ongoing part of the process.
Investment Teams Evolve to Cater for TAA
In a growing number of super funds, internal investment teams have evolved to support this shift. What began as a strategy function focused on high-level views has morphed into cross-asset macro teams that include traders, economists and specialists with hedge fund or bank backgrounds.
These teams do not just assess risk; they take positions, increasingly across a broader range of instruments. They now run curve trades such as 10-year sovereign bonds versus 30-year bonds, relative value equity views like European versus US markets, tactical overlays in FX or commodities, momentum-based positioning, cross-currency basis swaps and funding spread trades.
These are not always directional beta calls. Many rely on shorter-horizon signals and a more flexible governance framework to act in time. This broader approach to asset allocation draws on methods long used by macro hedge funds and multi-asset managers.
These are strategies I came to know well through years of alternatives manager research, portfolio design and governance work across both institutional and bank settings. Teams with a trading mindset often bring not only sharper signal filtering, but also the execution discipline and governance awareness needed to act quickly without undermining long-term objectives.
In some cases, these trades sit within internal alpha programs. In others, they are used at the portfolio level to express conviction or manage risks. The distinction is becoming more blurred, and the mindset of TAA is showing up in more places.
Improved Technology, Data and Governance Key to TAA Resurgence
This shift, seen across a growing set of funds, has also been enabled by stronger systems and infrastructure. Better execution tools, broader data access and more robust overlays mean teams can act faster and more precisely. Governance frameworks have adapted too, with clearer delegations and boundaries that allow room for these decisions without undermining the strategic asset allocation.
Importantly, TAA is not being adopted as a wholesale replacement for DAA; it is a complementary layer. Some funds run formal TAA portfolios with defined risk budgets. Others simply incorporate TAA-style thinking into their existing DAA processes. Either way, it is a recognition that no single lens is enough, especially in today’s markets.
During the “Liberation Day” policy shock, volatility spread quickly across bonds, equities, currencies and gold. Some institutional investors, whether through TAA-style programs or responsive DAA frameworks, were able to adjust positioning quickly as conditions shifted
For example, during the “Liberation Day” policy shock, volatility spread quickly across bonds, equities, currencies and gold. Some institutional investors, whether through TAA-style programs or responsive DAA frameworks, were able to adjust positioning quickly as conditions shifted. The point was not the label, but the combination of signals of different timeframes, governance and implementation readiness that allowed timely action.
Risk, Discipline and Agility
None of this is without risk. TAA decisions rely on judgement, timely execution and the ability to distinguish noise from signal. Faster-moving signals can perform well in directional or volatile markets and are often useful for detecting turning points. But in range-bound or sideways conditions, they may lead to overtrading or whipsaw losses. These strategies also require governance structures that support agility without encouraging overreach. When done well, TAA can help funds make better decisions more often, not just to outperform, but to avoid unforced errors.
And while it may seem like a luxury of scale, TAA thinking is not limited to the largest funds. Wealth managers and family offices already use these approaches, often with smaller teams and smart external partnerships. For smaller super funds, the same logic applies: with the right people, systems and outsourced support, agile decision-making is possible.
The most effective investment programs now blend long-term conviction with short-term adaptability. They use valuation where it works, but complement it with signals, implementation tools and structures that reflect how markets actually behave. This is not about trend-chasing. It is about being equipped to act, when it matters, in real time.
A Moment to Reassess
As asset owners navigate an increasingly complex and fast moving investment landscape, this may be a useful moment for many to consider whether their current decision making frameworks are fit for purpose. Are governance structures built to enable timely response? Do internal teams have the right data, tools and mandates to act on conviction?
Embedding more responsive, signal aware thinking into the investment process is increasingly part of how many super funds are approaching asset allocation – and for some, it may prove essential to navigating today’s markets.
About the Author
Michael Sommers explores how funds are bringing TAA into DAA to act on faster moving signals without abandoning long term beliefs. His perspective draws on extensive research of global macro and multi asset managers, independent reviews of DAA and overlay programs, and his time at HESTA leading the Portfolio Construction and Risk team responsible for the asset allocation framework and portfolio construction processes. There he oversaw long and medium term asset allocation and risk budgeting, rebalancing, core risk models, and the fund’s stress testing and liquidity frameworks, advising the Investment Committee. Earlier he was a Principal Consultant at Frontier Advisors providing total portfolio advice and leading alternatives and derivatives research. Earlier roles in market and credit risk on trading floors inform his perspective on derivatives and implementation. He now leads Redholme Advisory, working with institutional and wholesale investors on portfolio design, investment process and investment governance.
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