INVESTMENT MANAGEMENT GAME (IMAG)

Lesson 5: Tactical Allocation & Security Selection

IMAG — Investment Management Game

Learning Outcomes

By the end of this lesson you will be able to:

  • Generate and evaluate short-term macro and factor signals
  • Translate signals into tactical tilts away from the SAA
  • Apply fundamental and quantitative approaches to security selection
  • Execute decisions under liquidity and transaction cost constraints

Teaching chapters: Tactical Research Toolkit · Tactical Asset Allocation & Security Selection · Portfolio Implementation

Short-Term Research & Signals

What is Tactical Asset Allocation?

  • TAA = temporary, deliberate deviations from the SAA
  • Driven by short-term views on relative asset class attractiveness
  • Size of tilts is bounded by the risk budget (tracking error limit in IPS)
  • Horizon: weeks to months — not years (that is the SAA)

Note

A good TAA process starts with the SAA as the neutral position and asks: what do we want to overweight or underweight today?

Macro Signals

  • Business cycle indicators: PMI, industrial production, unemployment claims
  • Monetary policy signals: central bank rate decisions, quantitative tightening
  • Credit market signals: high-yield spreads, loan officer surveys
  • Sentiment indicators: consumer confidence, VIX, fund flows

→ Content: IMAG Economic Outlook screen walkthrough; signal extraction exercise.

Factor Signals

Factor Signal Typical asset class
Value Cheap vs. history (CAPE, yield spread) Equities, credit
Momentum 12-1 month price return Equities, commodities
Quality ROE, earnings stability Equities
Carry Yield differential FX, bonds
Low volatility Realised vol < market Defensive equities

→ Content: factor return history; current factor signal dashboard.

Signal Aggregation & Scoring

  • Individual signals are noisy — combine them into a composite score
  • Simple approach: equal-weight signals after normalisation (z-scores)
  • Advanced: factor model or machine learning aggregation
  • Output: a ranked list of asset classes from most to least attractive

→ Content: worked scoring example using IMAG data.

Tactical Asset Allocation

From Signal to Tilt

  • Composite score → rank asset classes → derive tilt direction and size
  • Tilt sizing: proportional to signal strength + inverse of tracking error cost
  • Constraints: IPS limits on tracking error; no short sales; maximum tilt per asset class

→ Content: tilt derivation table; IPS constraint check.

Risk Budgeting

  • Total active risk = sum of all tilts’ contribution to tracking error
  • Each tilt consumes a share of the active risk budget
  • Prioritise tilts with the highest expected information ratio (IR)

\[IR = \frac{\text{Expected active return}}{\text{Tracking error}}\]

→ Content: risk budget allocation table; marginal contribution calculation.

Overweights & Underweights

→ Content: final TAA tilts table — current round example (to be filled per round).

Team Process

  1. Each analyst presents their top signal
  2. Debate and reach consensus on tilts
  3. Check total tracking error against IPS limit
  4. Document the rationale — you will review it in Lesson 6

Security Selection

Within-Asset-Class Selection

  • TAA sets how much to allocate to each asset class
  • Security selection determines which specific instruments to buy
  • Adds another layer of active return (and active risk)

Fundamental Analysis — Equities

  • Top-down: sector attractiveness → company analysis
  • Valuation: DCF, price multiples (P/E, EV/EBITDA), dividend yield
  • Quality screening: return on equity, earnings stability, balance sheet strength
  • ESG overlay: flag red-rated instruments; apply exclusion list from IPS

→ Content: equity screening template linked to Cesim Analyst screen.

Fundamental Analysis — Fixed Income

  • Credit analysis: issuer financial health, coverage ratios, debt maturity
  • Relative value: spread vs. peers and history
  • Duration positioning: tilt toward short/long depending on rate view
  • Curve positioning: barbells vs. bullets

→ Content: bond selection scorecard.

Quantitative Screening

  • Apply factor scores at the individual security level
  • Rank within each asset class; select top quintile
  • Combine with ESG filter and liquidity screen
  • Diversification check: avoid crowding in one sector/issuer

→ Content: quantitative scoring template for IMAG instruments.

Portfolio Implementation

From Decision to Trade

  • Order types: market, limit, stop
  • Liquidity: check bid-ask spread and daily volume before sizing orders
  • Block trades vs. gradual accumulation

→ Content: Cesim order entry walkthrough.

Transaction Costs

  • Explicit costs: commissions, stamp duty
  • Implicit costs: market impact, bid-ask spread
  • Round-trip cost estimate per asset class
  • Trade-off: conviction level must exceed transaction cost drag

Rebalancing vs. Tactical Repositioning

  • Rebalancing: restore SAA weights after drift (mechanical)
  • Tactical repositioning: intentional deviation from SAA (active decision)
  • Netting trades: offset buy and sell orders where possible to reduce costs

Key Takeaways

  • TAA adds value only if signals have positive predictive power — be disciplined
  • Document every tactical decision: signal source, conviction level, expected horizon
  • Transaction costs are silent return killers — always estimate before trading

Simulation Task — Lesson 5

Deliverables: TAA + Security Picks

Tactical Asset Allocation:

Security Selection:

Further Reading

  • Chapter: Tactical Research Toolkit
  • Chapter: Tactical Asset Allocation & Security Selection
  • Chapter: Portfolio Implementation