Dynamic asset allocation

Strategic allocation sets a target mix and mostly leaves it alone. Tactical allocation is a deliberate, human call to tilt away from that target when the market looks attractive.

Dynamic asset allocation is a third approach, and this workbook is careful to keep it separate from the other two. It uses a pre-defined model. When a specific trigger fires — a valuation level, or a performance level — the allocation shifts automatically, following the model's rule rather than a manager's judgement call.

The point of building it this way is to take the guesswork out of the decision.

The workbook lists three types of asset allocation side by side: Strategic, Tactical, and Dynamic.

• Strategic allocation is set from the investor's goals, time horizon and risk profile, and rebalanced back to that original target periodically — it does not chase asset-class performance.
• Tactical allocation is a discretionary call on where markets are headed, suited only to seasoned investors with a large surplus, layered on top of a strategic core.
• Dynamic allocation uses pre-defined models. The triggers for a re-allocation are set in advance, in terms of asset class valuations or portfolio performance, and once a trigger fires the model reallocates automatically. The workbook's own words: dynamic allocation "removes the subjective element from asset allocation decisions."

A note on terminology. Some other exam papers use "dynamic asset allocation" as a plain synonym for tactical allocation. This workbook does not: here, tactical is a human, discretionary market call, while dynamic is a rules-based, model-driven trigger system. Read the paper the question is set in before assuming which meaning applies.

An adviser sets up a dynamic allocation model for a client's Rs 50,00,000 portfolio, targeting 60% equity, 40% debt, with one pre-defined rule: if equity valuations (measured by a market P/E band) rise above a set threshold, cut equity to 45% automatically; if they fall back below it, restore equity to 60%.

Suppose the market P/E crosses the upper threshold. The model, without the adviser making a fresh discretionary call, sells down equity from Rs 30,00,000 (60%) to Rs 22,50,000 (45%), moving Rs 7,50,000 into debt.

Compare this with a tactical call: the same adviser, believing (on judgement, not a pre-set trigger) that a specific sector is about to rally, temporarily raises the equity allocation to 70% for a few months. That is a discretionary tilt, not a dynamic-model trigger — the two are different mechanisms even though both move the portfolio away from its strategic target.

Chapter 18 (Risk Profiling for Investors), section 18.3.1, sets out Strategic, Tactical and Dynamic Asset Allocation as three distinct types in the same paragraph. Expect a question that asks you to match a short description — "pre-defined model, valuation-based triggers, no subjective judgement" — to the correct one of the three, and to distinguish dynamic allocation from a tactical call.

• This workbook treats dynamic and tactical allocation as different things, even though some other exam papers use "dynamic" as another name for tactical allocation — do not assume they always mean the same thing.
• Dynamic allocation is rules-based; tactical allocation is discretionary. The exam-testable difference is who, or what, makes the reallocation call.
• Dynamic allocation removes subjectivity — that is the workbook's own stated purpose. A question describing "no subjective judgement" is pointing at dynamic, not tactical.
• Strategic allocation is not rebalanced because an asset class is expected to perform well — that forecast-driven behaviour belongs to tactical or dynamic allocation, not strategic.