In the long term, equity markets tend to outperform bond markets. Or rather they should, according to financial theory. In real life, things are more complicated. After all, markets (and equity markets in particular) have shown to be very irrational at times. They can rise well above what any rational mind would consider to be “fair value”, and drop well below what the darkest pessimist had imagined. And they can even do both in less than a decade, as anyone who owned stocks between 2000 and 2008 can testify. If you started off on the wrong end of fair value, it becomes very hard indeed to outperform bond markets. That‘s why we’ve set up Vector Flexible.
In Flexible, when we think equity markets will perform well, we invest our assets according to the same methodology as Navigator, the oldest compartment within Vector. We screen global equity markets in search of undervalued stocks, and do so using an in-house developed quantitative model. This stock-picking model has outperformed the market with 4% in the past, and is designed to identify stocks with better than average growth, risk and valuation properties. Out of a vast universe, we construct a diversified portfolio of around 80 companies, that is well diversified across sectors and regions. But when we think equity markets might not perform that well, we will reduce our equity exposure in Flexible, possibly to 0%. This decision is based on the outcome of a quantitative decision process, that is designed to compare current market conditions to 55 years of detailed financial history, so as to place present conditions in historical perspective, and make a well-informed judgment about the direction of the markets. Our quantitative tool is based on 15 factors in total:
• 5 macro-economic factors (such as newly authorized Building Permits)
• 5 technical factors (such as the 200-day moving average of the S&P500)
• and 5 valuation factors (such as the current risk premium on equities versus bonds)
Vector Flexible has an absolute-return target, its first priority being capital-preservation.
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