Assessing TAA manager performance -: Simulations can help reveal forecasting ability.

For U.S. two-way tactical asset allocation (TAA) managers, performance is a function of at least two factors: forecasting ability and tilt size. Assessing the relative performance across a universe of managers is made difficult because of small peer group and relative short return histories. Simulated performance universes are used to decompose the source of relative performance and to overcome the small sample problems. Surprisingly, little forecasting ability is required, on average, to provide positive excess returns. Portfolio risk, measured as the probability of underperforming the benchmark, decreases with forecasting skill and is unaffected by tilt size. The author uses actual return and portfolio weight histories to assess the forecasting skill of U.S. TAA managers and demonstrates that after accounting for equity tilt, size, sample period, and length, seemingly equivalent: managers possess vastly different levels of forecasting ability.