Cutting Through the Noise

December 5, 2023 | By: Andy Kochar and Bill DeRoche

Cutting Through the Noise

AGF Investments’ new Macro Regime Model analyzes thousands of data points to develop a picture of the current macro environment, but also its likely direction going forward.


The world is changing fast. In the past two years alone, we have witnessed the emergence of the global economy from a planet-wide pandemic; the setting-in of higher inflation that hadn’t been seen in more than a decade; a dramatic shift in monetary policy as central banks raised rates; and at least two regional conflicts with wide-ranging geopolitical impacts. For investors, this state of flux might not be anything new – the global economy and markets are always evolving, after all – but the amplitude of the shifts may well be. Even those who conduct careful fundamental research into potential investments, considering factors like corporate earnings and valuations or creditworthiness and yields on the level of individual stocks and bonds, cannot wholly ignore the macroeconomic environment.

Yet that reality also presents challenges. For instance, with so many contributing forces, how can an investor even assess the current state of the macro environment? More importantly, since markets are forward-looking, how can they form an actionable forecast for macro conditions? And finally, can they tell which events, trends or data matter? Which developments or issues – an outbreak of war, an environmental disaster, a high-profile corporate collapse or any number of other events – are likely to make a difference to markets, sectors or even individual securities? And which ones are likely not to matter very much? In short, when so much is going on and there are so many potential game-changers to consider, how can an investor separate the signal from the noise?

Macro Regime Model

Over the past several months, a collaborative task force from AGF Investments’ Quantitative Investing and Investment Management teams have been working on finding a solution to this problem for our teams. Its goal: to support our investment managers with actionable insights into the macro environment and a functional tool to help them make more informed decisions. The result of their efforts is the AGF Macro Regime Model, which analyzes thousands of data points to develop a picture not just of the current macro environment, but also of its potential direction going forward – and, importantly, how that evolving landscape might affect different asset classes differently. The Model is more than a quantitative analysis tool, however, because it also relies on the knowledge and expertise of AGF investment managers. In other words, it hard-checks its approach against real-world experience.

How does it work?

On a basic level, the Model is a “two-by-two” schematic. It analyzes two factors – inflation and economic growth – to develop a picture of the current and future macro environment, or “regime,” and also accounts for market and financial conditions.

The approach yields four possible outcomes: Inflation and growth are both increasing (reflation), inflation and growth are both declining (deflation), inflation is rising but growth is declining (stagflation), and inflation is declining but growth is increasing (the “Goldilocks” scenario). It’s important to note that these outputs are cyclical, not secular; that is, the various macro regimes reflect states and changes in the economic cycle rather than long-term trends. So, it’s perfectly possible for the Model to identify a period of deflation in the midst of secular reflation.

Moreover, as much as macroeconomic conditions matter to portfolio management, they make their way into portfolios through prevailing financial market conditions, which have the potential to extend or contract economic cycles. Macro events are only relevant to portfolios if they have the strength to reprice risk meaningfully. Otherwise, they are simply noise. In AGF Investments’ collective experience, markets and the economy are closely connected, and so the Model captures this reality by including financial market conditions as a third input.

The Model continually analyzes real-time data to calculate probabilities for each regime going forward. That quantitative analysis develops a picture of likely macroeconomic conditions and assigns a level of confidence to that picture – for example, it might assign a 70% probability of inflation and growth increasing together in three months and a 30% probability of a “Goldilocks” environment, with growth accelerating and inflation falling. It is also a flow model, meaning that it forecasts not only change, but also the rate of change – which can help investment decision-makers better assess opportunities and risks. In that way, the Model empowers our portfolio managers to overlay the macro outlook onto their research, using it to inform their decisions in asset allocation, country allocation, portfolio positioning and trading strategies.

But the AGF Investments Macro Regime Model goes one step further. Once it has developed a probability-based forecast for macroeconomic conditions, it then develops an outlook for how different asset classes (equities, bonds, real assets, etc.), sectors (for example, Industrials, Utilities, Technology and so on), investment factors (for instance, value or growth) and regions may perform under a predicted macro regime. To do that, it relies on the data AGF Investments has amassed internally, as well as market information from external sources. Our portfolio managers can then add consideration of historical precedents to their decision-making process. Those precedents are not, of course, guaranteed to be replicated. But as the old maxim goes, “History doesn’t repeat itself, but it often rhymes.”

Because it analyzes so many indicators – historical, current and leading – the Macro Regime Model can help our investment managers understand what signals are worth paying attention to and which may be irrelevant. For example, when several regional banks collapsed in early 2023, there was widespread fear of spreading instability in the U.S. and global financial system. The crisis came as the macro environment was in a period of deflation (i.e. inflation and growth falling), and equities have historically performed relatively poorly during such periods. However, when the Federal Reserve announced an injection of capital to support the U.S. regional banking system, the Model predicted that the move would herald a macro regime change to a “Goldilocks” environment, which has historically been positive for equities. And that is exactly what happened: economic growth picked up and stock markets rebounded. In short, the Macro Regime Model correctly distinguished an event that mattered for equities (Fed support) from one (the regional bank collapse) that ultimately did not.

While the Macro Regime Model may be predictive, it is not definitive. AGF Investments’ portfolio managers are active asset managers with a view to the long term, and many of them practice a “bottom-up,” fundamentals-based approach to investment decision-making. The Model is not intended to change that. Yet it is intended to help managers better understand the macro environment now and in the future, as well as how investments may perform in that environment. At its core, it better enables long-term, asset managers like ours to respond to short-term, “macro” probabilities. And it is continuing to evolve, right along with ever more effective ways to analyze and leverage market and economic data.

It's sometimes said that information is power. But real power comes from the ability to gather, analyze, sort and transform information into reliable, actionable insights. That, ultimately, is what the AGF Investments Macro Regime Model has been developed to do.

Andy Kochar
Andy Kochar, CFA®
Vice-President, Portfolio Manager and Head of Global Credit
AGF Investments LLC
Bill DeRoche
Bill DeRoche, MBA, CFA®
SVP, Head of Quantitative Investing
AGF Investments LLC
Vice-President, Portfolio Manager and Head of Global Credit

Andy Kochar is a principal member of AGF’s Fixed Income Team and serves as the firm’s head of global credit. Using a cross-asset framework, Andy is responsible for the research and allocation of credit risk across all of AGF’s fixed income portfolios.

He previously served as Associate Portfolio Manager for AGF’s credit-oriented portfolios from 2013 to 2018. Prior to that, for more than five years, Andy served as Investment Analyst, Credit Research at Acuity Investment Management, which was acquired by AGF in 2011.

Andy earned a B.A. in Economics (Cum Laude) from York University and he is a CFA® charterholder.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
SVP, Head of Quantitative Investing

Bill DeRoche is Head of Quantitative Investing at AGF Investments LLC¹, a Boston-based investor advisory firm founded in 2009 and a subsidiary of AGF Management Limited. Bill is responsible for the overall leadership and management of AGF’s Quantitative Investment team and is a leader of AGF’s quantitative investment platform. AGF’s Quantitative Investment team is grounded in the belief that investment outcomes can be improved by assessing and targeting the factors that drive market returns. Bill is also a member of The Office of the CIO – a structure within AGF’s Investment Management team. This leadership structure encourages and further embeds collaboration and active accountability across the Investment Management team and the broader organization.

Bill has long-tenured expertise employing quantitative factor-based strategies and alternative approaches to achieve a spectrum of investment objectives. Previously, Bill was a Vice-President at State Street Global Advisors (SSgA), serving as head of the firm’s U.S. Enhanced Equities team. His focus was on managing long-only and 130/30 U.S. strategies, as well as providing research on SSgA’s stock-ranking models and portfolio construction techniques. Prior to joining SSgA in 2003, Bill was a Quantitative Analyst and Portfolio Manager at Putnam Investments. Bill has been working in the investment management field since 1995. Prior to 1995, Bill was a Naval Aviator flying the Grumman A-6 Intruder as a member of Attack Squadron Eighty-Five aboard the USS America (CV-66).

Bill holds a Bachelor’s degree in Electrical Engineering from the United States Naval Academy and an MBA from the Amos Tuck School of Business Administration at Dartmouth College. He is a CFA® charterholder.

¹ An investment professional with AGF Investments LLC, a U.S.-registered investment advisor firm and affiliate of AGF Investments Inc. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF Investments.

The AGF Macro Regime Model is available but not necessarily utilized in the investment decision-making process across all products or services offered by the AGF Investments.

Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of December 5, 2023 and are not intended to be comprehensive investment advice applicable to the circumstances of the individual. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained here.

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