The ARTEX Investment Process
How do we make our investment decisions?
Step One Understanding the Macro Overview: Questions we ask What is the state of the economy? What are fundamental and technical factors that suggest the future direction of the economy? What are the overriding investment themes of the moment? How could these themes affect market performance in six to twelve months?
Factors we observe Federal Reserve policy, global movements in capital flows, relations between economic sectors, coordinated action within the currencies markets, shifts between value and growth investments, and the state of the Yield Curve
Actions we take Our portfolio allocation between stocks, bonds and “alternative investments” is gauged by our understanding of market conditions and a comparison to historic parallels. This is what we mean by “understanding the macro overview.” Then, we decide on a course of action based on possible risk/reward outcomes.
Step Two Understanding the Fundamentals: Questions we ask Where are interest rates headed? What is the rate of inflation growth within major global regions (US, Japan, Europe)? What is the price of gold? How strong / weak is the US Dollar? Are commodities prices increasing or decreasing? Are stocks in a favorable or unfavorable environment?
Factors we observe Inflation rates (CPI and PPI in Europe, Japan and the US); the price of gold, the level of the CRB Index, long and short term interest rates.
Actions we take In inflationary environments, Artex reduces its stock exposure, and increases its allocation to “alternative investments,” which includes energies, metals and currencies. In deflationary or favorable market environments, Artex will reverse and adjust—that is, increase its allocation to stocks and bonds, and reduce its “alternatives” portfolios.
Step Three Understanding the Technicals: Questions we ask What are the major medium and long term trends in stocks, bonds, currencies, and inflation-sensitive markets? How are investments within each sector performing relative to one another?
Factors we observe Technical “break out” points, relative strength between the investments and within a sector, stop levels (exit points for trades), and volatility exits (exit points for trades based on directional volatility), and entry points.
Actions we take Artex filters its signals in the direction of longer term trends; we also use technicals for stops, re-entries to new positions, “add-ons” to existing positions, and “cut-backs” of positions. Relative strength technical signals are used to switch between sectors, or between investments within sectors. Importantly, volatility also plays an important role in taking profits. Finally, Artex will also take positions against the major trends in periods of extreme volatility.
Step Four Understanding the importance of Portfolio Management: Questions we ask Should portfolio allocations between sectors be static or dynamic? How often should we rebalance our portfolio, and what is the optimal method for rebalancing? How does contract volatility affect our margining of sectors and investments within sectors? How should we re-distribute profits / losses among portfolio sectors? How, and how often, should we hedge our currency exposure?
Factors we observe Current price levels and the changing margining of all investments within the portfolio. Fundamentals and Technicals, and their effect on asset allocations, particularly between sectors. Price relationships and relative strength of investments within (similar) sectors. The level of the US Dollar vs. other major currencies. Excess cash in the portfolio.
Actions we take We can increase or decrease exposure between sectors, or investments within a sector, we can exit positions or add to existing positions based on technical or fundamental factors, we can standardize our margining among all sectors and investments, we can increase or decrease our US dollar hedge based on technical factors driving the currencies markets and how the US Dollar is performing against other major currencies. We rebalance portfolios and try to re-distribute profits only during pivotal points in overall market cycle.
Other Considerations Since Artex is a systematic long-only global macro manager, we do not “short” individual stocks. Instead, we can short stock indexes against our long stock positions in order to hedge positions in the face of a falling stock market. Artex maintains very long term positions, using wide stops and low leverage. Our turnover is low, and our commission costs are among the lowest in the industry. Such a strategy allows us to avoid “choppy,” sideways markets, and helps us endure more “negative carry” when markets go against us.
Ongoing Research and Development The Artex research team conducts a variety of ongoing testing and analysis in search of new investment strategies. We explore new ways of viewing traditional investment markets, and we refine our existing programs and portfolio logic. This research tends to enhance and advance our existing programs. Our current projects include research and questions in the following areas: Portfolio logic: Is it better to maintain a static portfolio, or create a dynamic asset allocation logic? Emerging Markets: How can we take advantage of global out-performance (vs. the US and other major markets), and reduce portfolio volatility in these less liquid markets? Can we locate a profitable system to trade lower grade corporate bonds? Can we develop a better universe of stocks than used in standard indexation? Can we find a better way to identify undervalue stocks? Can we find a way to use fundamentals to choose stocks that have better long term prospects? These are some, certainly not all, of the various issues involved in our research efforts. This ongoing exercise can be compared to the famous Myth of Sisyphus, which finds our character Sisyphus condemned by the gods to push a rock uphill for eternity, only to discover upon reaching the top of the mountain with his rock, that it falls back down, crushing him in its wake. Research of our kind is of a similar character. It is a process of discovery through failure, interspersed by moments of epiphany. We know the best route to success is through research, a process characterized by failure, from which we tend to learn our best lessons.
How do we make our investment decisions?