Our modelling suite

Asset allocation models driven by macroeconomic fundamentals is one of Fathom Consulting’s core competencies.

At the heart of Fathom’s modelling suite is what we call the core model unit. Both high-tech and user-friendly, this three-part system enables users to construct macroeconomic forecasts and scenarios, a visual representation of these in the form of fan charts, and a forecast-consistent asset allocation, where the distributions implied by the fan charts are used to derive the optimal allocation between bonds, equities.

The chances of any single point forecast being correct are close to zero, and we take our lead from policy makers around the world in taking account of uncertainty explicitly. Hence all our projections come in the form of fan charts, which take account of the range of uncertainty around a central projection, generally taken from consensus or market-based expectations. We use a mix of normal distributions to reflect not just the most likely scenario but also the ‘fat tails’ of that distribution.

By taking consensus pricing from the markets as the starting point for our ‘central projection’, we can then come up with typically two alternative, fully articulated ‘scenarios’. The resulting ‘fan charts’ naturally embody views on both risk and return which we then pass through an asset allocation tool (the Black Litterman optimiser) to yield an optimal portfolio. Crucially, this optimal asset allocation is internally consistent with the underlying economic forecast. The process is illustrated in the schematic diagram below:

 

Our in-house macroeconomic model identifies GDP, the consumer price index, the three-month interest rate, the ten-year government bond yield and the effective exchange rate index for each of the US, Japan, the Euro Area and the UK. In total, our asset allocation model covers around 42 assets across 12 countries.

This model lies at the heart of our quarterly G4 outlook and asset allocation. In this document, we integrate the outlooks for the G4 economies and financial markets in a fully consistent system. The reader can follow a single chain of logic running from economic scenarios at one end to optimal asset allocation at the other. Using this model, we help construct various scenarios for the world economy, which we then weight together to form our forecast distributions for GDP, inflation, interest rates and various asset prices in the major economies.

Of course, asset allocators have to take account of uncertainty too, and our forecasts provide a natural measure of expected returns and risk. The fan charts can be thought of as ‘contour maps’ of a probability distribution. We use the parameters of these distributions – means, standard deviations and skews – to inform our views about asset allocation. The portfolios of stocks, bonds and cash are therefore completely consistent with the economic scenarios described at the beginning.

All the models and tools used to construct the forecasts are available to subscribers in easy-to-use spreadsheet formats, enabling them to construct their own forecasts.

To view a sample of our global outlook and asset alocation product: >>> CLICK HERE <<<

To view the forecast archive: >>> CLICK HERE <<<

For more details, please contact us at enquiries@fathom-consulting.com or on  +44 (0)20 7796 9561