Tactical Funds Fumbling Their Chance to Shine This Year: Morningstar

What You Need to Know

Conditions should be good for tactical-allocation funds this year after they lagged peers for a decade, Morningstar says.
While the environment is right, tactical funds as a group have performed only slightly better than competitors so far this year.
Some tactical funds have done well in 2022 but picking the winners in advance is nearly impossible, Rekenthaler suggests.

Tactical-allocation funds, which shift assets based on changing market conditions rather than sticking to long-term positions, should have an opportunity to shine this year but haven’t done so yet as a group, according to Morningstar.

While tactical fund managers can’t prepare for unexpected market shocks, anticipated pressures, like Fed rate hikes, should provide fertile conditions for success, John Rekenthaler, Morningstar’s research vice president, wrote Monday.

This tumultuous market year has brought the “ideal climate” for such funds, which “desperately need a victory,” Rekenthaler said. After outlining their long-term and recent performance, however, he concluded there was no cause to invest in them.

The steady stock and bond returns that investors enjoyed for the decade leading up to 2022 didn’t provide a great environment for tactical funds, he said. “Lacking opportunities to show their steps, while also burdened by their higher costs … the group badly trailed its rivals,” Rekenthaler said. 

Tactical funds also were less likely to survive during that decade, he added.

Year-to-date as of June 30, tactical funds had lost 14.4% on average, just a bit better than strategic funds, hardly enough to overcome the ground lost to competitors over the years, according to Rekenthaler. “In that rate of closing speed, tactical funds will fully regain their lost territory in …  the year 2145. Give or take,” he wrote.

Investors holding the best-performing tactical-allocation funds, though, may do better, he said, noting that “several tactical funds have notched outright profits this year, with several more landing only slightly in the red.”