A portfolio manager for a high-net-worth Canadian client with a long-term strategic asset allocation of 70% Global Equities and 30% Canadian Fixed Income observes accelerating inflation and rising interest rates internationally. The manager believes these conditions will persist for the next 12-18 months, potentially negatively impacting global equities. Which of the following actions aligns with a tactical asset allocation approach?

Question: A portfolio manager for a high-net-worth Canadian client with a long-term strategic asset allocation of 70% Global Equities and 30% Canadian Fixed Income observes accelerating inflation and rising interest rates internationally. The manager believes these conditions will persist for the next 12-18 months, potentially negatively impacting global equities. Which of the following actions aligns with a tactical asset allocation approach?

Answer options:

• Rebalancing the portfolio back to 70% equities and 30% fixed income to maintain the long-term target. ✅ Increasing the allocation to commodities and real assets by 5% by reducing the equity exposure, expecting them to outperform in an inflationary environment.
• Selling all international equities and reinvesting in only Canadian equities due to perceived domestic market strength.
• Maintaining the current 70/30 allocation, as market timing is generally unreliable over short periods.

Correct answer: Increasing the allocation to commodities and real assets by 5% by reducing the equity exposure, expecting them to outperform in an inflationary environment.

Explanation: Tactical asset allocation involves making short-term, deliberate deviations from the strategic asset allocation to capitalize on anticipated market opportunities or mitigate risks. Increasing exposure to inflation-sensitive assets like commodities and real assets is a tactical move in an inflationary environment.