There’s being wrong and there’s being wrong. Looking back at the Christmas-era tactical asset allocation (TAA) portfolios, we can acknowledge that 2019 delivered a sturdy set of gains, making the rough edges of last year’s calls easier to bear. The performance review shows that a few misjudgments could have been avoided with a different regional emphasis, but it also highlights a number of correct calls and a disciplined approach that protected capital and delivered meaningful upside. With the benefit of hindsight, the case for greater exposure to European blue-chip shares appears stronger than the actual allocation chosen, while the weight placed on Japan is a point that invites reconsideration. In the larger arc of 2019, the overarching theme was to favor equities over bonds, and the opportunity to take on a bit more risk in favor of equity markets could have yielded a more pronounced upside. The portfolio construction also benefited from deliberate exposure to specific equity sub-asset classes and real assets, which contributed positively to overall performance.
Two portfolios were maintained — one designated General TAA and the other dubbed Multi-factor TAA — both emphasizing a substantial cash position. The cash holdings functioned as a margin of safety, a buffer against potential market selloffs that could erode returns in a downturn scenario. Like an insurance policy that, in practice, was not called upon, the cash allocation represented a cost to overall performance, colloquially referred to as cash drag. Yet, despite the ongoing drag, both portfolios achieved returns exceeding 9 percent, a solid outcome given the broader market environment for 2019. When focusing specifically on the factor-based variant of the strategy (the online version of this article contains the complete performance data), the model demonstrated a cumulative three-year return of 7.3 percent. While this result acknowledges a robust performance, it was achieved at a higher cost, which has influenced the decision to pivot attention toward the General TAA moving forward. The question that naturally arises in this context is whether shares can sustain the ascent into 2020, a topic that invites deeper exploration into market dynamics, valuation frameworks, and portfolio construction discipline.
Section 1: 2019 performance and strategic takeaways
In 2019, the markets rewarded equity exposure more than fixed income, reinforcing a broad historical tendency across longer horizons but with notable annual variations. The TAA portfolios under discussion were designed to blend strategic-tilt considerations with tactical adjustments, a balancing act that sought to capitalize on structural themes while preserving capital through defined risk controls. The year’s performance underscores the value of having built-in flexibility and a framework that can adapt to changing regimes without abandoning core investment principles. The 2019 results further underscore that a diversified approach, when executed with discipline, can yield meaningful upside even when some regional exposures do not align perfectly with the realized market leadership.
From a practical standpoint, the portfolios benefited from their capacity to ride a favorable equity cycle while maintaining a safety net through cash reserves. The deliberate inclusion of listed infrastructure as an equity sub-asset class reflected a strategic attempt to capture the resilience and income characteristics associated with infrastructure assets, even as traditional equity markets demonstrated strong momentum. Global real estate investments contributed to the diversification lens, delivering double-digit returns that reinforced the case for including real assets within a balanced portfolio framework. On the precious metals side, gold performed well through the year, providing a hedge against certain macro risks and serving as a different kind of store of value within a diversified portfolio.
The performance story for 2019 was not a uniform tale of unmitigated success across every position. Yet the overarching aim of managing risk while pursuing upside ran consistent with the portfolio design. The cash allocations, in particular, served as a controlled mechanism to dampen volatility and prevent precipitous losses in the event of a sharp market correction. This risk management philosophy is a hallmark of the TAA approach: it recognizes that protection against tail risks is an essential counterpart to seeking alpha through tactical tilts and strategic weightings. While the presence of cash drag is a real cost in a rising market, the corresponding protection it affords is a form of insurance that aligns with the broader objective of preserving capital for future opportunities.
Section 2: Portfolio construction and the two TAA variants
The two portfolios in focus — General TAA and Multi-factor TAA — are differentiated by their underlying mechanism for selecting equity exposures, yet they share the same overarching objective: to balance potential upside with robust risk controls. The General TAA uses market cap-weighted regional indices to determine its equity exposure. This approach tends to reflect broad market trends and the relative performance of regions in a proportionate manner, ensuring that the portfolio’s regional bets are aligned with the size and influence of each market. In contrast, the Multi-factor TAA employs factor-tilted indices for equities, adjusting exposures through a more nuanced lens that considers factors such as value, momentum, quality, and other academically or empirically supported drivers of return. The two strategies thus represent different philosophies about what drives equity returns and how best to allocate risk at a regional level.
One of the core reasons for maintaining both approaches was the intended risk-control benefit of high cash allocations. In practice, cash serves as a cushion against unfavorable conditions, enabling the portfolios to absorb shocks while preserving the ability to reallocate when opportunities arise. The insurance-like role of cash was central to the tactical framework: it gave the managers the discretion to avoid overexposure to markets that could experience abrupt drawdowns, particularly in periods of elevated volatility or uncertain macro signals. However, the cost side of this protection cannot be ignored. The cash drag represents a performance headwind in rising markets, where the opportunity cost of holding non-yielding cash can weigh on total returns over time. The evaluation of this trade-off lies at the heart of ongoing portfolio optimization efforts.
Performance outcomes from 2019 show that both the General TAA and the Multi-factor TAA achieved returns in excess of 9 percent. This is a remarkable milestone given the challenging environment for active tactical strategies, which must contend with shifting regimes, evolving correlations, and the friction costs inherent in rebalancing large, diversified portfolios. The higher-cost nature of the factor-based approach is a critical consideration. While the Multi-factor TAA offered the advantage of potentially more selective exposure to drivers of returns within equities, it came with a price tag — a feature that has driven the decision to prioritize the General TAA moving forward. The three-year performance for the factor portfolio, a measure of its ability to generate consistent alpha relative to a benchmark, stood at 7.3 percent. This is a respectable figure, but the higher costs and the relative underperformance versus the General TAA in a multi-year horizon have shifted emphasis toward the latter as the primary driver of the strategy going forward.
Section 3: Regional exposure decisions and the Europe vs Japan debate
Hindsight can be a powerful teacher in portfolio construction, especially when it involves regional tilts and the relative performance of major markets. In the 2019 context, there was a recognition that European blue-chip shares could have commanded a larger share of the portfolio’s regional allocation. European equities, particularly among blue-chip names with entrenched market positions, displayed resilience and a potential for earnings growth that might have contributed positively to overall returns. The critique of the actual allocation — a heavier tilt toward Japan and a comparatively lighter exposure to Europe — invites an exploration of the structural differences, currency considerations, and risk-reward dynamics that influence such decisions.
Japan’s market environment, characterized by a distinct set of dynamics — including a different growth trajectory, monetary policy stance, and corporate governance trends — can lead to divergent outcomes relative to Europe. The decision to overweight Japan during the evaluation period may have been justified by specific risk control considerations, diversification benefits, or tactical expectations about currency moves and earnings momentum. Yet, with the benefit of hindsight, the balance may have tipped in favor of Europe’s more exposed, benchmark-following segments, which could have amplified exposure to global cyclical and defensive drivers at a time when European equities were navigating a supportive fundamental backdrop and reasonable valuation levels.
The debate over regional exposure underscores several enduring principles of TAA and tactical asset allocation in general:
- The importance of adaptive regional tilts in response to macro signals, valuations, and policy developments.
- The need to weigh currency risk against potential earnings growth, especially in a multi-region framework.
- The role of diversification across regions to manage exposure to idiosyncratic shocks that can affect a single market disproportionately.
- The trade-off between following a benchmark-based approach (market cap-weighted indices) vs a more discriminating, factor-driven approach that seeks to harvest systematic drivers of returns.
Section 4: Real assets and gold — contributors to the 2019 returns
Beyond traditional equities and fixed income, the 2019 performance narrative included notable contributions from listed infrastructure, global real estate, and gold. The decision to include listed infrastructure as an equity sub-asset class was vindicated by its ability to deliver stable returns and diversification benefits within an equity-oriented framework. Infrastructure assets possess characteristics that can be appealing in a tactical context: inflation-hedging potential through regulated cash flows, duration-like properties that align with long-horizon investment horizons, and relatively resilient demand across business cycles. The outcome in 2019 demonstrated the value of treating infrastructure not merely as a passive fixed-income-like instrument but as a strategic equity component capable of cushioning volatility while contributing to overall alpha.
Global real estate, included as a dedicated exposure within the portfolio, produced double-digit returns in 2019. This outcome reinforced the advantages of including real assets in a diversified portfolio, particularly in environments where traditional equities face concerns about valuations, rising rates, or cyclical headwinds. Real estate offers a mix of income generation and appreciation potential, coupled with diversification benefits due to its relatively low correlation with other asset classes in certain market conditions. The positive result also highlights the importance of active selection and broad geographic exposure to realize the full benefits of real estate across sectors and markets.
Gold’s performance in 2019 was robust, providing an additional form of diversification and a potential hedge against macro risks, including inflationary pressures and geopolitical tensions. While gold is not universally a predictor of returns across all time frames, its role as a store of value and its non-correlated behavior relative to equities offered a stabilizing counterweight within the overall portfolio framework. The inclusion of gold, along with other real assets, demonstrates a deliberate strategy to balance growth-oriented exposures with assets that may perform differently under various macro scenarios.
Section 5: The role and cost of cash as a defensive mechanism
Holding cash within a tactical allocation framework is a deliberate choice tied to the risk management objectives of the strategy. The cash component serves as a critical line of defense against potential market drawdowns, acting as an insurance policy that ensures liquidity and the ability to quickly respond to changing conditions without having to divest other positions at potentially unfavorable prices. In this context, cash drag — the performance cost associated with holding cash rather than deploying capital into higher-yielding or higher-growth assets — becomes an important consideration. The practical effect is a trade-off: protection against downside versus the opportunity cost of missing upside in rising markets.
The evaluation of the cash drag requires a nuanced view. Although the insurance-like function can protect capital during volatilities, it is essential to examine whether the level of cash held is optimal given current market signals, risk appetite, and investment horizon. If markets show signs of sustained trends and a clear beta to equities, a high cash allocation might impede the portfolio’s ability to capitalize on favorable moves. However, if risk conditions deteriorate or if valuations become stretched, maintaining cash can prevent draws that would be much harder to recover from in the long run. The 2019 experience suggests that while cash drag was a cost, the safety provided by the allocation did not prevent the portfolios from achieving strong overall returns, underscoring the value of disciplined risk control even in a favorable environment.
From a management perspective, the cash allocation remains a topic of ongoing optimization. The challenge lies in maintaining a delicate balance between preserving optionality and delivering meaningful upside while controlling for tail risks. The decision to shift focus toward the General TAA moving forward is partly driven by the relative efficiency and lower cost structure of the approach, particularly when cash drag is weighed against the realized gains in a rising market. The broader implication is that portfolio construction must continuously weigh the protective benefits of cash against the potential for missed opportunities, especially as market regimes evolve.
Section 6: Performance metrics and forward-looking strategy
A key data point from the 2019 performance review is the factor-based portfolio’s three-year return of 7.3 percent. While this figure demonstrates a positive trajectory, it is also accompanied by a higher expense profile, which has implications for the net realized return after costs. The higher cost structure associated with factor tilts means that, over time, substantial outperformance would need to be achieved to justify the incremental expense, especially in periods when market movements align broadly with standard benchmarks. In light of this, the decision to prioritize the General TAA going forward reflects a strategic assessment of where the most efficient return opportunities are likely to arise, given the current environment, cost considerations, and risk management objectives.
The immediate question — Can shares keep rising in 2020? — invites careful analysis. While 2020 may present continued upside for equities in certain regions, it is unlikely that the market will deliver uniform gains across all geographies and sectors. The tactical approach must remain vigilant, with an emphasis on disciplined rebalancing, dynamic tilt opportunities, and a rigorous evaluation of macro signals, valuation levels, and policy developments. A robust framework for scenario analysis and stress testing is central to maintaining portfolio resilience over a range of potential outcomes. The 2019 experience, with its strong performance and measured risk controls, underscores the value of a systematic approach that can adapt to evolving conditions while preserving core investment principles.
Section 7: Risk management, diversification, and portfolio dynamics
A fundamental takeaway from the year’s performance is the enduring importance of diversification across asset classes, geographies, and factor exposures. The deliberate inclusion of cash as a defensive tool, the allocation to listed infrastructure, and the real estate stake collectively illustrate a multi-pronged approach to risk management. Diversification helps reduce exposure to any single shock, while the tactical element allows for opportunistic positioning when favorable conditions align with the portfolio’s risk framework. The challenge remains to maintain this balance in the face of changing risk premia, correlations, and macro regimes that can alter the relative attractiveness of different asset classes.
The design of the two TAA variants reflects an acknowledgement that no single approach will consistently outperform in every market environment. The market cap-weighted regional framework provides a straightforward, transparent mechanism that aligns with broader market dynamics, while the factor-driven approach introduces a more nuanced view of what drives returns within equity markets. Both require careful monitoring of costs, turnover, and implementation efficiency to ensure that the intended risk/return profile remains intact. The ongoing evaluation of performance, costs, and the relative merits of each approach informs a continuous optimization process that aims to sustain robust outcomes while honoring the strategy’s core mandates.
Section 8: Forward guidance and practical implications for investors
For investors observing these developments, the key takeaway is that strategic asset allocation frameworks anchored in disciplined risk controls can deliver meaningful upside even after accounting for costs and drag. The 2019 results illustrate that a well-constructed tactical approach, with clearly defined roles for each asset class and sub-asset class, can produce strong returns while maintaining a degree of resilience in the face of volatility. The strategic emphasis on the General TAA moving forward reflects a belief in the efficiency of market-cap tilts at the regional level, combined with the discipline to manage exposure and risk through cash and diversification.
From an execution standpoint, ongoing monitoring, rebalancing, and performance attribution are critical components of a successful TAA program. The ability to interpret regime shifts, adjust tilts responsibly, and maintain a coherent narrative around risk and return will determine whether the strategy can sustain its momentum in subsequent years. The inclusion of real assets like infrastructure and real estate, alongside traditional equity exposures and gold, provides a well-rounded portfolio that seeks to perform across a spectrum of macro scenarios. Investors should remain mindful of the cost differentials between strategies and how these costs translate into net performance, particularly in environments where market beta remains a dominant driver.
Conclusion
In reflecting on 2019, the experience reinforces the value of a disciplined TAA framework that blends strategic allocations with tactical adjustments, while maintaining a disciplined risk-management posture. The performance highlights include the robust gains achieved by both portfolios — the General TAA and the Multi-factor TAA — with the latter carrying higher costs and thus facing a more challenging path to superior net returns over longer horizons. The recognition that Europe could have received greater emphasis, and that Japan’s exposure might warrant adjustment, provides a practical roadmap for refining regional tilts in the year ahead. The strategic inclusion of listed infrastructure as an equity sub-asset class, the strong performance of global real estate, and gold’s contribution to portfolio diversification collectively demonstrate the merit of a comprehensive asset allocation approach that spans traditional equities, real assets, and precious metals.
The experience of 2019 also makes clear the trade-offs inherent in cash ownership as a protective measure. While cash drag remains a cost, the defensive shield it provides is a meaningful component of the risk-control discipline that underpins a responsible TAA program. As the focus shifts to the General TAA, the emphasis will be on implementing a cost-efficient, diversified framework that preserves the ability to respond to changing market regimes while seeking to deliver consistent, long-term value. The question of whether shares can continue to rise in 2020 remains open, but with a well-structured, disciplined approach to regional exposure, factor tilts, and real assets, the portfolio is positioned to navigate a range of possible outcomes, leveraging the lessons of 2019 to inform prudent expectations for the year ahead.
