Dynamic Asset Allocation based on Inflation Nowcasting

January 22, 2024

New research reveals a multi-asset investment strategy that rotates with inflation conditions and outperforms benchmarks.

2023 has demonstrated the need for agile investment strategies capable of navigating the evolving inflationary landscape. RavenPack has created a multi-asset investment portfolio designed to pivot in response to various inflation conditions. It consistently outperforms the S&P 500 benchmark and strategies based on alternative inflation indicators.

The strategy is underpinned by RavenPack's nowcasting models which leverage a combination of NLP and Bayesian neural networks for precise and timely inflation predictions. Subsequently, the original portfolio is adjusted based on the investor's risk preferences.

The researched showed that:

  • A risk-based multi-asset strategy that rotates between equities, commodities, and a low-risk asset based on inflation conditions can deliver a Sharpe ratio of 1.29;

  • The strategy effectively times risk premia across asset classes, maximizing returns while managing risk.

  • Dynamic portfolio rules and gradual transitions minimize turnover while enhancing strategy performance.

FIGURE: Multi-Asset Inflation-Based Strategy with a 5% volatility target employs the RavenPack inflation indicator to identify inflation states and construct the unscaled portfolio. The strategy considers the cost of leverage, calculated by subtracting the Federal Funds rate. The out-of-sample backtest covers the period from November 2013 to August 2023 and when compared to the S&P MARC 5%.

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