Dynamically Navigating the Changing Currents

Part 2 of the Stone Creek Advisors Blog Series

Our investment process was built to navigate the twists, turns, and surprises of a more volatile investment landscape. The world has fundamentally changed. The long economic cycles of the past are just that, a thing of the past. Going forward we believe cycles will be more muted and shorter. In this new environment, being dynamic, diversified, disciplined, focused on risk and armed with a broader set of tools, will be imperative.

Our strategy is rooted in data. Specifically, how economic and market data have historically helped decipher the risk versus reward profile of different markets. We believe this data helps inform where we are in the economic cycle and whether expectations are consistent with reality—the best opportunities lie when expectations and reality are disconnected. Instead of a stagnant equity versus fixed income allocation, we adjust our asset class allocation within a range above and below our anchor point (based on the objective aligned with a client’s individual risk tolerance). When we think the risk/reward profile is in our favor, we are overweight equities and underweight fixed income. Within equities and fixed income, we are overweight the riskier and more growth-oriented areas of the market. However, when we do not believe the risk/reward profile is in our favor, we are underweight equities and fixed income and in the more defensive areas of each. Different sectors, industries, countries, factors and currencies perform better at different points in the economic cycle.

While impossible to time the actual top and bottom of the market, we can measure the amount of risk that has historically accompanied similar environments and what expectations are and incrementally adjust our exposure for the current investment environment. The intent of this process is to take risk out of client portfolios early and put capital back to work early. However, taking money off the table near the top builds dry powder to deploy at much more compelling valuations when other investors who are fully invested are panicking and running for the exits. We are of the belief that this strategy provides a smoother ride with less exposure to risk when volatility picks up and more exposure when volatility is lower.

With a background in portfolio management and asset allocation, we are focused on what the portfolio looks like as a whole. We fully understand the risks and exposures within our benchmark and are anchoring off the benchmark. We are intentionally overweight sectors, cap sizes, regions and factors that we believe tend to perform best in the environment we are in and are moving towards and we are underweight the areas that have historically underperformed. No two cycles are the same. The quantitative analysis sets the structure. Then, qualitative analysis comes into play. Qualitative analysis incorporates black swan events, political impacts and other variables unique to the current environment, market cycle, and business cycle. Our process is rooted in data (the science), enhanced by qualitative analysis (the art).

MGO One Seven LLC (“MGO One Seven”) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. Services are provided under the name Stone Creek Advisors, LLC, a DBA of MGO One Seven. Investment products are not FDIC insured, offer no bank guarantee, and may lose value.