The Cycle Master: Felix Zulauf
Felix Zulauf is a world renowned money manager. We are not so lucky to have a full and detailed report of Felix Zulauf investment strategies and methods, however we have researched his public statements to see what we can learn.
Felix W. Zulauf, born 1950, has worked in the financial markets and asset management for almost 40 years. He started his investment career as a trader for a large Swiss Bank and received training in research and portfolio management thereafter with several leading investment banks in New York, Zürich and in Paris. Felix joined Union Bank of Switzerland (UBS), Zürich, in 1977 and held several positions over the years including managing global mutual funds, heading the institutional portfolio management unit and at the same time acting as the global strategist for the UBS Group. After two years with a medium-sized Financial Organization as a member of the executive board, he founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy. Mr. Zulauf focused on macro and strategic issues within the firm. Felix Zulauf always believed that the world economy and the financial markets move in cycles. That has helped him avoiding all the major casualties in the financial markets since the 1973/74 bear market in equities.
From Zulauf firm website we can post the Zulauf investment philosophy.
Progress in economies and capital markets is not linear but cyclical. Financial markets go through long valuation cycles from over- to undervaluation over time spans of 15-25 years. During a business cycle, the economy goes through different stages and so do the prices of the different asset classes and assets. A comprehensive analysis of economic and market trends leads to the conclusion of where the economy is in its business cycle and to specific ideas of what asset classes should rise or fall in value. There are essentially four different areas of market analysis. The monetary framework shows what amount of liquidity is available for investments in assets. Valuation indicates the level of potential risk and reward. Momentum measures the health of a trend and sentiment is best used as a contrary indicator when it goes to extremes.
Some of the known Flex Zulauf great calls in the equity markets:
- Bearish July 1973
- Bullish 1982
- Bearish June 1987
- Bearish Japanese N225 Jan 1990
Extracts from the Ritholtz interview that discloses in more detail Zulauf global macro investment methods.
..."I'm a believer in cycles. I strongly believe that an economy -- all economies -- do not move in linear but in cyclical fashion. And so do financial markets. And my goal is to catch most of the up cycles and most of the down cycles, because assets are priced based on where we are in the cycle. So I do a lot of cyclical work. I do not moon cycle but the classic business cycle. There is the 3-5 year inventory cycle that they teach in basic economic theory, then there is the investment-related cycle which lasts 9 years. And then you have the 18-20 year real estate cycle and etcetera. I try to get a big picture of where the major economies of the world are moving and where the risks and pitfalls will be in the next six to 12 months. That's my work -- to find out where we are in the business cycle. And then I apply classic tools like monetary analysis, I do valuations because capital markets go from one extreme to the other. They never go in between and reverse to where they come from -- that's important to understand."..
.."The down cycle is usually here to shake off the weak participants in the system and to correct the excesses that have been built up during the up cycle. When you do not let that happen, you take more and more excesses with you, which over the long term and over many cycles will build up to extremes"..
..."I draw like a sine curve for a cycle. And according to my analysis of the big picture of a monetary factors of market prices and trends and momentum and valuations/ sentiments, I try to place on that sine curve where the economy and the different markets are at the time. And then, based on that, I read reports and glance through the newspapers and I try to think whether the news today confirms what I think is where the markets are in the cycle. If they do, then [I] go on to the next thing. If they don't, then I have to check it out and see if this is noise, or an aberration, or a delay, or whatsoever. That's the way I look at the short term."...
.."I moved away from leverage, because too much leverage is where you make the most mistakes"..
Consider a very large investment house, their investment committee would consist of several players: technical and market timing analyst, equity fundamentalist, economist, accountant, lawyer, central bank watcher, fixed income manager, portfolio manager, risk manager, forex advisor, and finally a global macro analyst. Flex Zulauf would be the latter. With billions under management, trustworthy and accurate tea leaf readings of the global macro economics is essential to the investment house survival.
Readtheticker is not a macro economic site, however we do have a parallel with Zulauf in that we agree with his approach regarding cycle analysis. Financial markets are not linear, they a cyclical in nature, and with statistical studies one can prove if a cycle is significant (or dominant). Knowing the fundamentals and sentiment within the market allows the cycle analyst to understand price action distortions to the cycle (skewed tops and bottoms to cycle peaks and troughs, price inversions to the cycle). We also agree with Zuluaf that intermaket analysis of cycles is critical to determine influences one market has over another. Zuluaf is a rock star in the global macro hedge fund world. Much can be learned from his approach.