The Citadel approach also considers the macro-economic environment. Recessions are fairly rare events but have a large impact on all markets. Identifying the onset of recession in advance is a powerful tool for adjusting asset allocation. We have developed a methodology for identifying these inflection points.
Any successful macro-economic adjustments to a portfolio must avoid false signals. Unnecessary trading increases costs and decreases tax efficiency. We avoid overtrading by limiting the indicators we use to gauge economic performance and the probability of recession.
The Citadel Portfolio starts with the sound strategic allocation of the Fortress Portfolio:
Citadel clients, in consultation with their Alhambra adviser, choose a baseline risk portfolio from 0% to 60% bonds. Our macro-economic adjustments will shift your allocation based on the economic outlook. If our indicators show a slowdown in economic growth, your portfolio will shift from the baseline portfolio to the next, more conservative allocation:
If our indicators show an acceleration of economic growth, your portfolio will shift from its current allocation to the next more aggressive allocation:
The adjustments can be more extreme when our indicators show a high probability of imminent recession or an approaching exit from recession.
Economic growth will slow and accelerate multiple times through the course of a business cycle. Sometimes the change will be small and other times quite large but the Citadel portfolio is not designed to catch every minor change. Most of the time your portfolio will be invested in your baseline allocation.