Investment Management: Asset Allocation
Simplicity is at the heart of all we do.
At Prescient Investment Management China simplicity is at the heart of all we do. While equities outperform over the long term even strong markets such as the S&P 500 have periods of low returns, for example investing in 2000 or 2007, which will result in 0 real returns over a decade. At Prescient, we do not try to forecast the future since timing is one of the most difficult things to do in investments. However, we have identified certain factors that, when used consistently, are helpful to asset allocation. By mixing the signals they give, we believe that even though we won't get the timing exactly right, on aggregate, we will be more invested during periods of good return and vice versa.
Due to the high number of retail investors in China, one simply cannot ignore sentiment. Our model uses a variety of input to try and ascertain sentiment towards an asset class. When the sentiment is positive we would allocate more to the asset class and vice versa.
Valuation is a terrible short-term timing tool, however over the long-term, it is one of the best predictors of forward returns especially in periods of extreme valuation. We use both historic as well as forecasted valuation parameters to make our decisions. Unlike sentiment, valuation changes slowly and the evidence around normal valuation is weak, however at extreme valuations our indicator works extremely well.
In China and globally, policy plays a vital role in asset performance and financial stability markets. In general, policy makers are not trying to disrupt the economy but tend to be counter-cyclical. In periods of weak economic governance it provides more support to the economy and in periods of strong economic growth, governments often have tighter policy to ease an overheated market. However there are two common mistakes policy makers typically make. During the period of recovery, economic policy stays too easy fighting a historic recession and in a weakening economy, monetary policy is too tight fighting historic inflation. We use our own economic indicator to gauge how the economy is doing, and should a policy maker make a mistake, we will take advantage of these instances.
Our entire asset allocation process can be summed up as overweight and cheap assets that are rising with policy support, while avoiding expensive assets that are falling with no policy support.