Reading through the Management Discussion of Fund Performance for the Accumulus Talisman Fund reveals a textbook example of a major problem with tactical asset allocation: your call might eventually prove to be the right one but the market could still move against you. Recall that in 2006 the fund returned -11% compared to 19% for the S&P/TSX 60 Index. Here’s how the report explains the fund’s under performance:
Initially, the early months of 2006 were characterized by strength, especially in the TSX as the influences that drove the market in 2005 continued to spill over in the early months of the year and the Fund stayed with the investment profile which had worked so well in 2005. By late spring, however, the market began to slip back although initially not enough that protective measures were thought necessary to be taken. By late June, however, our metrics flashed a preliminary overall ‘sell’ signal. Given our concerns based on strong
historical parallels, we took action to forestall any further downside risks, using index futures contracts to freeze the Fund’s asset value until we could determine whether or not that signal was good or not. Notably lacking (then as now) was any significant upside potential in the Financial Sector, so the fund did not hold any weighting there.As is sometimes the case after a sell signal is rendered, the market may have a rally before heading lower, and therefore we maintained our hedge position when, in retrospect, it would have been better had we unwound it. Nevertheless, we continued to perceive growing market risks such that we created a synthetic short position for the Fund overall using index options late in the year. We did so because our proprietary value investing approach to stock selection demonstrated fewer and fewer true opportunities as time went on which is normally a signal to us that markets are on very thin ice. One of the positive aspects of our analysis
was that we had assiduously avoided the income trust sector (save one holding) because of its questionable value. Therefore its collapse late in the year did not hurt the fund as it did for many others.Overall, 2006 turned out to be a poor year for the Fund relative to our peers in the Canadian equity mutual fund universe, in sharp contrast to 2005 in which the Talisman Fund stood in the top decile of all fund managers. While in retrospect, we might have been less aggressively bearish in our management approach, at no time did we feel that our actions were inimical with the goals of the fund, nor that our overall analysis was necessarily wrong.
After a bruising and brutal bear market, many staunch buy-and-hold investors are starting to lose faith and wondering if market timing is the answer. They may want to keep in mind the usual experience of market timing typified by this example.
