Multi-Asset Investing

Profiting from the economic cycle using the Investment Clock
 
Forecasting future asset class returns are, needless to say, challenging. To do so effectively requires, among other things, a clear picture of your starting point. Where are we in the cycle ? What is the timing for increased inflation? To generate profits for clients one must be able to model in real time when the world economy moves from one phase in the cycle to another; Trevor Greetham, a member of Fidelity's asset allocation group, uses a range of proprietary tools to generate a "now-cast" of each possible economic growth and inflation outcome to drive fund positioning in our Multi-Asset Growth Fund on a real time basis. The output from these models is summarised in our "Investment Clock".  

Now-casting using the Investment Clock
 
The Investment Clock approach recognises different points within the economic cycle and differentiates between phases which are likely to generate growth and inflation readings based on past trends and the current momentum of lead indicators. These indicators are updated on a monthly basis to build an expectation of how the global economy may perform over the coming three to six months.

The growth reading sets the relative weighting of cyclical and defensive assets (North-South on the clock diagram). The inflation reading sets the weighting of financial assets versus real assets (East-West).

Time lags in the release of economic data mean it reflects what has already happened in the economy. However, to profit we need to recognise in real time when the world economy moves from one Investment Clock phase to another. Therefore, we need a “now-cast” of each possible economic growth and inflation outcome, growth and inflation being the two key measures of economic activity. To build this now-cast, we consider an array of trend indicators, leading indicators and price signals from the markets themselves. This now-cast drives fund positioning on a real time basis.

With the benefit of hindsight we can identify the historic phases of the US economic cycle by taking note of the major peaks and troughs in the growth and inflation cycles.

Based on back testing, some asset classes perform better than others in each phase: the Investment Clock links the phases of the economic cycles to the performance of the asset classes:




Source: FIL Limited. For illustrative purposes only

The Investment Clock below shows the four key stages of an economic cycle:

• Stagflation (like we saw in mid-2008). A difficult time for most markets where growth has moved below trend but inflation concerns are high. As the Clock shows, we believe this is a period where Cash can outperform most other investments.

• Reflation (July 2008-March 2009). Often characterised by a period of interest rate cuts, we believe this is often a period of the cycle when bonds can perform well.

• Recovery (such as that which has been experienced through the summer of 2009). Often follows a period of reflation and can represent the best conditions for stocks to perform well; improving growth with falling inflation.

• Overheat (where we believe we were headed in Q4 2009 and into Q1 2010). Typically when commodities tend to shine through as the prospect of inflation rises are coupled with growth above trend.



The Fidelity Multi-Asset Growth Fund

Managed by Trevor Greetham, the Fidelity Multi Asset Growth Fund (MAGF) aims to achieve long-term capital growth by investing in one or more funds that provide exposure, whether by direct investment or through other funds to global asset classes, mainly equities, commodities and property, and with some exposure to bonds, money market instruments, cash and deposits. The underlying fund(s) may also use derivatives and forward transactions for investment purposes.

• Trevor Greetham uses a diversified approach to investing, which aims to achieve real growth over the long term with reduced volatility versus that which an investor in an all-equity fund might experience.

• The fund invests primarily through flagship funds managed by Fidelity, and other specialist vehicles. This multi-manager approach diversifies the risks associated with single-manager strategies.

• The Multi Asset Growth Fund harnesses Fidelity’s acclaimed Investment Clock approach to asset allocation, which links the performance of asset classes and equity sectors to the evolution of the global economic cycle.

• Recognising the fund’s long term growth aims, there is a structural bias toward growth assets, such as equities, commodities and real estate, with generally lower allocations to store of value assets such as bonds and cash, as the chart below shows.

• The Tactical Asset Allocation has precise constraints and the guidance is for growth assets to be up to 100% of the fund (from 75% in the benchmark) while maintaining a minimum investment of no lower than 65%, and for defensive assets to arrive maximum to 35% (from 25% in the benchmark).

Adding value & Selecting and blending managers to generate alpha

Having established the optimal asset allocation for the fund, Trevor scours Fidelity’s huge universe of specialist funds to select the best that meet his investment criteria for this fund. There are up to 100 funds specialising in equities, bonds, cash and property, as well as specialist global sector funds, available to Trevor, who can also consider investments from outside Fidelity (such as exchange traded funds) for exposure to commodities. The aim: selecting and blending the best of these funds to meet the objectives of the Multi-Asset Growth Fund.