Each asset class is assumed to have a fundamental fair value (earnings expectations for equities, interest rate expectations for bonds) which are driven by macroeconomic drivers, which informs long term fair value. In addition, we assume that each asset class has short term valuation deviations driven by macro and market drivers (multiples for equities, spreads for credit and fixed income debt). We monitor when the short term valuation drivers push prices either toward or away from long term sustainable fair values.
Chantico Global believes that inefficiencies exist in the global markets that create opportunities for investors to generate returns in excess of an optimal strategic portfolio. We use macroeconomic inputs and forecasts to determine a fundamental fair value for individual asset classes. We then use our Chantico Global Asset Allocation Framework to monitor five categories to determine overall attractiveness of the various asset classes on both an absolute and relative basis. We evaluate each category on two dimensions: current state (weak to strong) and direction (deteriorating to improving). We assign ratings according to the combination of these dimensions. These ratings are used to determine buy and sell signals.
The Tactical Asset Allocation Investment Case
To find a case for making an investment, we evaluate three scores in combination. First, the macroeconomic score informs us of the external influences acting upon an asset class, sub asset class or thematic group of assets. The fundamental score informs of the robustness of the fundamentals of an asset class, sub asset class or thematic group of assets. Finally, the valuation score informs us on the value that the market has placed on that asset class, sub asset class or thematic group of assets. In scenarios where the valuation score does not agree with the macroeconomic score or fundamentals score, we believe we have identified a case for tactical asset allocation investment. In addition, when the short term fundamental estimates deviate from long term forecasted trends and the valuation score does not reflect this, we also believe we have made an investment case.
The Tactical Asset Allocation Trading Case
Once an investment case has been identified, we then look to some shorter term indicators which can help us to understand if pricing dynamics are supportive of a reversion to long term trend or an adjustment to fair valuations. The flows and liquidity score informs us of the direction of fund flows and the liquidity score informs us of the overall liquidity of the asset class, thus providing us the sentiment and ease of trading in an asset class. The price action score measures technical, risk structure and sentiment to gauge whether an asset class trend is likely to continue as it is or to break down and change directions. These can help avoid situations where the market can remain irrational longer than one can remain solvent. This keeps us aware of when enabling factors are still at play (i.e. low or negative interest rates, excess liquidity, etc.) despites an otherwise negative investment case and vice versa.
The Chantico Global Asset Allocation Framework forms the cornerstone of the Tactical Review research.
The purpose of the Tactical Review research is to provide access to a disciplined and consistent monitoring process for a selected set of asset classes which is based in the Chantico Global Asset Allocation Framework. The Asset Allocation Newsletter provides a broad overview of the asset allocation and macro landscape and identifies themes and considers scenarios for tactical asset allocation. The Asset Class Monitor covers the major global asset classes, summarizing the findings of the Chantico Global Asset Allocation Framework by category.
This research can be customized to cover and evaluate the investor’s specific asset class line items, risk guidelines and investment policy statement goals through the portfolio monitoring and recommendation mapping reports. Chantico Global can also assist investment committees in documenting the reasoning for trades through the Trade Documentation service which can ensure discipline within the investment committee or investment staff in monitoring trades and evaluating exit opportunities. Chantico Global can also assist in portfolio aggregation and attribution reporting to help evaluate the performance of recommendations and decisions.
Finally, Chantico Global can assist with portfolio construction, sizing and categorization issues when new managers are evaluated for addition to an existing portfolio.
Vulnerability to external shocks; fiscal robustness
9 – 12+ months