Insight Investment

The performance of any asset class is driven by a complex set of forces. Some are driven by ‘top-down’ or macroeconomic influences, and others are shaped by ‘bottom-up’ or security-specific issues, which collectively drive a market in a specific direction. Other influences can be captured by looking through the lens of factors (sector, style, and many other risk premia). Of course, valuations play a part – especially the price investors (the market) are willing to pay, at any point in time, for the range of attributes that make up an underlying investment.

Taken together, this can be a bewildering list of variables to track and analyse. From an asset-allocation standpoint, macroeconomic, or cyclical forces, appear to have a strong influence on returns, and this observation led us to build a simple transparent framework to help us understand how different macro regimes can influence the behaviour of individual asset classes.

Combining growth, inflation and real rates regimes allows us to easily compare prevailing conditions with history, and analyse how different asset classes performed over similar periods. Once the prevailing regime is established, our framework provides important insights into how the regime is likely to evolve, allowing us to adapt our asset-allocation appropriately.