Regime-Based Investing

Research

Man Institute - Regime-Based Investing (11 pages)

This paper walks through seven regime definitions and how six assets and strategies perform in the various states. Don’t miss the nine observations from the data at the end of the paper (and below).

1. Inflation is probably the most predictable of the regime frameworks, in terms of the magnitude of returns and the persistence of direction. If you are only allowed to use one economic datapoint to guide your decisions, US headline CPI should be it.

2. On my definition, there has not been a real growth boom since the 1990s. Fingers crossed for the AI productivity miracle.

3. L/S Equity Value is consistently one of the hardest investment strategies to fit into a regime framework. It is a myth, for example, that it consistently benefits from high and rising inflation, even if it did so in the recent episode. Indeed, the only heuristic I think you can take from the above is don’t touch it when the yield curve is bull flattening.

4. Equity bull markets are 80% of history. Don’t forget the simple lessons…

5. Bonds are positive (in real terms) in little more than half of equity bear markets. Historically there have been better defensive diversifiers than the traditional equity foil.

6. Equities have ALMOST ALWAYS worked when real growth is booming and when monetary policy is being loosened. Trend has ALMOST ALWAYS worked when Value is in the ascendant. These are fat pitches.

7. Trend and Commodities have ALWAYS worked in states of high and rising inflation. Bonds have ALWAYS worked in deflationary environments, as well as when monetary policy is being loosened. These are obese pitches.

8. L/S Equity XS Mom. has historically done 10% real in states where Value is underperforming, versus 1% in the opposite. There’s a reason you often see these two as bedfellows.

9. The consistency of momentum, both time series and cross-sectional. In almost all frameworks, L/S Equity XS Mom. and Trend are positive more than half the time in all states. This is partly by design, given that for many of our regime definitions we include the constraint that a regime cannot be shorter than six months. But it also hints that, if you can hold through initial reversals, patterns often reassert.

Berkshire Hathaway - Annual Letter to Shareholders (16 pages)

Read Warren Buffett’s annual letter, which begins with a tribute to Charlie Munger.

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