There’s little point in basing investment decisions on what happened last year or even last week. At Harbour Reach, our approach centres around forming a view of the outlook, with the emphasis on asset classes. We take a broadly top-down approach, but also look at bottom-up information to gain a clearer understanding.
We conduct qualitative analysis to assess the outlook for the economy, earnings, inflation, interest rates and risk. This provides a general picture of the market environment and of where in the business cycle we might be, as well as any other issues that might affect the distribution of possible future returns. In addition, we always assess the shorter-term outlook with one eye on the long-term context.
We use quantitative models to derive an estimated return for each asset class. But we don’t take the expected returns at face-value. We cross-reference the returns with our qualitative analysis and make adjustments if necessary. For example, we may adjust expected equity returns upwards if the dispersion in returns within the stock universe is creating opportunities for active managers. Often the quantitative models are most useful in that they provide a clearer picture of the particular drivers of the market at the given time, be they valuations, earnings growth, or falling interest rate expectations.
We don’t rely on any single approach, and although we notionally estimate returns, we are actually looking to understand future risk, to both the upside and the downside.