Practical Applications of Tactical Asset Allocation, Risk Premia, and the Business Cycle: A Macro Regime Approach

Abstract

In <b><i>Tactical Asset Allocation, Risk Premia, and the Business Cycle: A Macro Regime Approach</i></b>, from the March 2023 issue of <b><i>The Journal of Portfolio Management</i></b>, <b>Alessio de Longis</b> and <b>Dianne Ellis</b> of <b>Invesco</b> propose a tactical asset allocation methodology based on identifying key phases of the business cycle and tilting portfolios toward risk premiums that outperform during each phase. They provide a rules-based approach for predicting phases of the business cycle based on leading economic indicators and the global risk appetite. They focus on three risk premiums as the key elements for implementing the methodology: the term premium, the credit premium, and the equity premium. The authors demonstrate the use of their methodology with multiasset and fixed-income portfolio examples. The examples show a potential to generate excess returns, compared to a buy-and-hold benchmark, while maintaining an equivalent level of risk over the long term.