Global Growth Model
Stratton Street’s disciplined investment process incorporates both top down and bottom up elements when constructing our portfolios. We understand the importance of macro positioning across a market cycle to ensure consistent performance. Whilst our credit selection process ultimately determines the underlying positions within the portfolio, we utilise a number of proprietary models to ensure we are well positioned from both a duration and credit risk perspective. Macro positioning is an essential for effective management of credit portfolios - and we are active in rotating our macro positioning to fit.
One of our primary models that we have been using since 1997 is the Stratton Street Global Growth Model (“GGM”) - this is a proprietary model that utilises three economic indicators:
- US ISM1
- German IFO2
- Japanese inventory to shipments ratio
The data points above are widely available and we use simple regression analysis to determine the weighting to each factor. More importantly, the factors incorporated within our GGM are typically available ahead of OECD Industrial Production (“IP”)3 data by ~6 months, providing us with a leading indicator of where we are in a global macro cycle.
This information can be invaluable to credit managers - by understanding where we are within a global macro cycle we can determine how much credit risk we want to take. For example we know that weak global growth is supportive of high grade bond markets; whilst in an expansionary phase lower grade credits outperform.