Asset cycles are an enduring feature of financial markets. If you are going to invest in cyclical assets, it’s important to make the journey through the cycle worthwhile. It will always be advantageous to lean into a cycle, i.e., to deepen positioning as the cycle moves against you. In an ideal world, you would reach your maximum position at the trough of the cycle. The crucial corollary is that you never want to take your maximum position too early. Of course, it’s never easy to time positioning so precisely, but this insight does favor processes that build in a deepening mechanism (such as we do with our adaptive allocation to value factors in equity portfolios, for example).
It may not always be apparent, however, which assets are cyclical, and which are secular. When in doubt, we argue for assuming they’re cyclical—and adopting a countercyclical decision mechanism. So many forces inherently create asset cycles: underlying economic cycles, factor cycles, the general principle of reversion to the mean, e.g., through corporate competition. On top of that, you have human behavior, which is inherently pro-cyclical. If you want to build a disciplined countercyclical decision mechanism, investors and fiduciaries may want to consider tracking the flows of funds (and dry powder particularly), then skewing allocations in the opposite direction.