The US election is just around the corner, risk is increasing, and the Fed’s policy support is losing momentum. On these two pages we will give an update on how we measure this in our algorithms, how we apply these algorithms in our funds and mandates, and how this approach has helped us manage risk and perform.
As you will see in our algorithms on the following page, the situation is not as stable now as it was in 2016. The support from this year’s hyperactive QE policy is fading and it may soon be time to reduce risk decisively. Let us start by re-caping our last Trump election experience.
When we went into the 2016 US presidential election, we still worked for a very large institution with responsibility for USD 100bn+ in portfolio strategies. Our traditional mandates were overweight US equities and credit, and our new systematic investment strategies entered Election Day with overweights of 10% to 20% in equities.
As Trump’s lead grew during the night (CET) after polls closed, our losses accelerated. As we now know, things turned around and the positive signals from our algorithms were proven right. The trades we had entered over summer 2016 played out well securing that our strategies outperformed in 2016, through 2017 and into 2018 (by then which time we had started an IT company).
Fast forward to 2019, where we have started 3 new funds with our clients and partners in ACCI. These are run on our cloud-based technology platform and, as you can see in the charts below, both the ACCI Diversified fun and the ACCI GFO have done relatively well during their first recession.
ACCI Diversified is a cautious red a return of 7%, which is in line with what we expect annually across the business cycle. And as seen in the figure below, it has avoided a large part of the drawdowns seen in its Morningstar peer group USD Flexible Allocation and the neighbouring peer group Moderate. We continue to improve our technology, and expect to be able to move out of the markets earlier, and to capture the re-bounds better than we did in Q2.
That said, we are not set up for short term trading and after cutting all risk positions in March we only re-entered in May. Events like the “Corona Recession” are not our specialty and we will have to wait for a more traditional recession or lasting bull market to add to our relative outperformance.
The same can be seen in our GFO strategy and the associated fund shown in the figure above (the full Morningstar analysis is available for professional investors). For Fixed income investors the world has changed, and with rates close to zero or below, it can be tempting to hold on to existing high yield positions and live with the drawdowns. This is the type of thinking bubbles are made of.
Our allocation decisions are based on the reading of our algorithms. One component of these is shown in the chart below. Here we measure how monetary policy works as the credit impulse flows from the Fed and the increasingly policy-guided USD fixed income market into the wider system of global finance. As you can see, this impulse has started to decline. Although this development has not yet taken down our full set of algorithms to levels where we start reducing risk in the fund mentioned here, we are getting close. So this time around, we may reduce risk before the election.