By Jerry Wagner Like a skeleton found in a closet, investors discovered in the first quarter of 2020 that their portfolios were not being managed in the manner in which they had believed. A little history: As the market moved steadily higher in the aftermath of the twin 50%-plus market crashes of the first decade of the new century, investors in managed accounts were repeatedly assured by their managers that they were being actively managed. Critical thinking and questioning were muffled by the profits achieved and the low level of volatility displayed by the markets after 2009. It was the time of the ascendency of the index funds. Yet what was sold as active management of a portfolio of these funds was really just “set it and forget it.” The imprecision of the word “active” gave cover to those who were nothing more than static allocators. Likewise, the use of “tactical” to describe the strategies was overused and inappropriate. Over the years, I have continued to be frustrated by the industry’s attempt to blur the meaning of these words. Setting the record straight on active management and tactical investing Many years ago, I tried to get all in the industry on the same page when they employed the term “active.” I concluded that active investing is multidimensional. It contemplates buying and selling, a holding period, and a strategy that is responsive to market movements and/or fundamental factors. “Tactical” investing has an even more specific meaning. It is often contrasted with “strategic investing,” which focuses on creating a portfolio that is usually statically diversified into a number of key asset classes. Tactical investing involves, instead, the shifting of the weights allocated to different asset classes or funds within an investor’s portfolio on an active basis to take advantage of a trading opportunity. At one end of the active management spectrum, tactical investing can morph into market timing—the movement of 100% of a portfolio in one asset class into a 100% investment in a different asset class—stocks to bonds, for example. You can read more about the active management spectrum by downloading our white paper “A Passive Core Is Not Enough” (for financial professionals only). Tactical investing is a form of active management. Both active management and tactical investing are examples of opportunistic or advantageous investing. Practitioners search for opportunities and market advantages to lower risk or increase returns. As such, it is very different from rebalancing. Rebalancing one’s portfolio merely requires periodically changing the percentage held of an asset back to the strategically allocated percentage required by the original static model. Many investment managers have advertised that this essentially minimal, one-way ( back to the static model) activity makes them an “active” or “tactical” manager. If it is to be considered so, a simple dollar-cost-averaging program that requires no professional manager is just as effective and just as “active” or “tactical.” Many of these managers will argue that they are actively managing your portfolio because they rebalance monthly or quarterly. But no matter how often these types of investment managers rebalance, they still are not true active or tactical managers in my book. These closet buy-and-hold allocators are not seeking to exploit a market advantage (after all, they always sell their winners and buy their losers). And they are not searching for opportunities for above-market profits or to reduce their portfolios’ risk beyond what can easily be achieved with simple 70-year-old portfolio theory available everywhere on the web for free. The big exposé Those managers who for years have assured investors that they were actively managing their portfolios have been unmasked. The statements you received at the end of the first quarter of 2020 as an investor or financial adviser tell the tale. Stocks peaked on February 19 and bottomed on March 23. With this decline, the S&P 500 Index (the typical benchmark for stocks) lost 33.78% and the American Funds Balanced Fund (a good example of a 60/40 passive portfolio) fell 22.32%. For the entire quarter, the S&P 500 fell 19.73%, the average equity fund lost 22.33% (according to Lipper ), and the average fixed-income fund lost 4.56%. A 60/40% balanced mix of the average Lipper equity and fixed-income fund returns would have lost 15.23%. We offer more than 100 equity and fixed-income investment strategies on our Strategic Solutions (SS) platform. The average Flexible Plan Investments, Ltd., SS account lost just over 5% for the first quarter of 2020 after maximum fees. How did your separately managed account weather that storm? Do your results demonstrate a better result than the indexes? Do they indicate that the manager opportunistically sought out risk-management opportunities? Is your manager really actively managing your money? Why is it important to know this now? If you’ve been told that your portfolio is being actively managed but your returns from the first quarter of 2020 do not bear this out, now is the time to make a change. Why pay for the benefits of active management and not achieve them when a crisis hits and the markets tumble? We know why so many companies say that they will actively manage your portfolio (even when they don’t). It is an enticing story. Saying you will manage investments by being responsive to the financial markets is easier than trying to sell you on investing that requires you to “buy and hope,” “wait it out,” or “be patient.” This is especially so given that they are asking you to enter into a relationship where you pay them to actually take steps to secure your investments. It is easier to get you to agree to pay for a service where something is continually done for you rather than a service that is really just “set it and forget it.” I wish I could make all of the closet buy-and-hold allocators stop claiming that they actively or tactically manage the separately managed accounts they market to investors, but I can’t, and I can assure you, they won’t. But for now, at least, we’ve shined a light on them and they have been exposed.