The various Fog-Lights models provide clear and reliable signals on interest rates, forex, business cycles, inflation, corporate earnings, relative valuation and equity markets. They represent an invaluable decision-making tool for any investor. Their use can generate annual outperformance levels of up to 40%. Sound macroeconomic calls determine 80% of investment performance It is generally admitted that asset allocation in the wider sense accounts for approximately 80% of a diversified portfolio’s performance, whereas the impact of stock selection can only be deemed accessory. The use of decision-support tools in the macroeconomic perspective of investment can thus be viewed as a crucial element to ensure rigorous and performance-oriented asset management. Unfortunately, most macroeconomic forecasts are imprecise and difficult to interpret in practice. Determining the orientation of future movements is key Most economic forecasts aim to predict the future level of a given macro-economic variable. In portfolio management, however, predicting exact levels is far less relevant than the direction in which a given variable is likely to move in future. Let us consider an example: if the current rate of interest is 2% and economists’ medium-term interest-rate forecasts range between 2.2% and 1.8%, it is clear that one set of predictions points to a weaker, the other to a rising bond market. The spread of interest-rate forecasts (0.4 percentage point) is not very large, but the investment decisions required by either extreme prediction are diametrically opposed. Fog-Lights is based on official data rather than forecasts Fog-Lights models are based on objective, historic data, i.e. on publicly released time series of economic and financial variables that are statistically processed to explain and foresee a given target variable. Exogenous variables are selected on the basis of economic theory, statistical considerations and our empiric knowledge of financial markets. Fog-Lights: a true asset-allocation tool Fog-Lights currently provides forecasts on interest rate levels and the rate curve in the US, on American monetary policy, on the economic cycle in the United States, Japan, Germany and the G7, on corporate earnings trends, on the relative valuations of the US and European markets, as well as on the USD/EUR exchange rate. As a result, such a tool can serve as base for a full-fledged asset-allocation strategy as it provides information on the distribution of investments among various asset classes (e.g. between stocks and bonds by means of forecasts regarding the economic cycle, corporate earnings or interest rates) as well as within a given asset class (e.g. by determining preferred currencies, maturities or geographical sectors). The model even provides indications on a selection of economic sectors, by means of indications on whether cyclical (chemical industry, construction, machinery industry, etc.) or non-cyclical stocks (pharmaceutical industry, food, etc.) will be favoured at a given point in future. Investment decisions are facilitated by clear signals One of the Fog-Lights models’ outstanding features resides in the fact that its results require neither interpretation nor decoding. Quite the contrary, these models provide clear signals which can be directly applied to an investment process (see examples below). Furthermore, beyond its reliability, the Fog-Lights models’ attractiveness lies in its forecasting periods. Indeed, the model’s indicators provide leading indicators over 2 to 3 months, which is time enough to enable large-scale portfolio readjustments, making it a highly valuable tool for professional portfolio managers. On the other hand, the forecasting period is sufficiently short to enable a timely recognition of a given investment choice’s validity. Fog-Lights, however, is not intended for day-trading, but is indeed conceived as a long-term management tool.
Fog-Lights: a valuable tool that requires to be put in perspective This, of course, does not imply that the models’ conclusions must be followed blindly. As far as we are concerned, if the Fog-Lights set of models plays a substantial role in our decision-making process, we also exploit other sources of information before reaching our final asset-allocation decisions. A quantitative model, reliable though it may be, remains a mere tool and should not obliterate investor judgement. As an illustration of this viewpoint, we took practical advantage of the recent buy signal issued on the US dollar by gradually unwinding our currency hedges rather than massively buying the dollar. Indeed, currency markets, and particularly the dollar exchange rate, are also sensitive to psychological factors which cannot be taken into account by any model.
Do you want to know how Banque SYZ & CO SA can help you in managing your assets? Contact us. Banque SYZ & CO SA: A different kind of bank Private Banking - Discretionary asset management - Investments in hedge funds - Active advisory - Institutional Asset Management - Services to Independent Managers - OYSTER Funds - Alternative Investments (3A SA) The SYZ & CO Group comprises several distinct entities, such as Banque SYZ & CO SA and 3A SA. |
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