Investment Process

Investment Process


Investment is a cyclical business - there are times to favour defensive assets, or pro-cyclical ones, cash or even precious metals. Many investment managers will consider valuations as a cornerstone of their investment process, which whilst clearly a useful guide for navigating the inevitable volatility inherent in financial markets, may be to miss a more fundamental driver of asset class prices - liquidity.

Liquidity Business Cycles and Monetary Policy

We use a particular lens to view the world - one which draws heavily upon the liquidity available in the financial system, as we feel it is an oft overlooked but pivotal driver of the business cycle - and by extension, the prospects for asset class prices too.

Financial shocks which lead to falls in equity and bond prices, may not be driven by a global economic slowdown, just in the way that gains in equity markets in recent years may not have been justified by earnings growth or improvements in the real economy. In fact ,they may well be better explained by changes in liqudity conditions.


By mapping liquidity and financial conditions, we seek to identify which 'regime' the investing landscape best describes.

Regime based investing means tracking financial conditions including the rate of change of inflation and credit to determine which stage of the cycle we are in - Goldilocks, reflation, inflation and deflation.

We simply our asset allocation approach into four quadrants - a macro economic compass.

Tracking the Global liquidity cycle

Each stage typically favours certain investment strategies for that part of the cycle:

Overweight: Fixed Income, Growth over Vlaue and corporate credit
Underweight: Emerging Market equities, commodities and cyclical sectors;
Overweight: Energy equities, cyclical sectors, gold and coporate credit
Underweight: Volatility protection, hedges and cash
Overweight: Emerging market equities, banks and industrial commodities
Underweight: Government bonds, corporate credit and growth / technology stocks
Overweight: Government bonds, USD Dollars and Volatility Protection
Underweight: Equities, corporate bonds, emerging markets and commodities


Volatility control as a concept is not a new one - it means seeking to reduce the volatility of a portfolio by rebalancing between perhaps the growth assets, being equities, and a defensive asset, tyically meaning fixed income. The volatility of the portfolio is reduced and capital is preserved as assets are shifted into more defensive vehicles. This has worked well for investors for over two decades.

The Volatility Challenge

Unfortunately, we sense we have entered a new regime where financial markets will exhibit more volatility. The cause of that volatility is likely to be interest rate volatility as market participants try to assess the prospects for inflation the world faces. In such an environment, traditional fixed income or defensive asset classes may be a contributor to volatility and not the safe port in the storm they have been in recent years.

At ARIA we institute a defined process which seeks to reduce volatility as financial markets begin to display higher realised volatility and a number of tools of the trade to address it:

Metrics we measure in a defined volatility control mandate:

Metric Response

Realised Correlation Changes

Consider asset mix to include currencies, commodities and hedges to mitigate scenario whereby bonds no longer provide a stock market hedge.

Higher realised volatility

Often before markets fall, they will experience a higher level of volatility. During such times, we increase our volatility control overlay strategies, by considering hedges, protection, reducing net market exposure and moving into more defensive investments.

Higher realised volatility in ARIA Funds

Systematically increase cash to keep portfolios within targeted volatlity mandates.

As the volatility regime changes, our investing tactics follow

Concerns surrrounding the persistence of inflation, and the need for Central banks to respond, will continue to drive volatility in asset markets. After years of rising liquidity, to address growing inflationary pressures, monetary policy makers are being forced to reduce the availability of global liquidity and tighten financial conditions. Historically, that has led to tough trading conditions for markets, and sustained volatility in equity markets. Our range of funds, which employ our propreitary 'Dynamic Volatility Control' techniques should be well placed to mitigate more challenging conditions.


For more information and answers to any questions you may have, please contact us.

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