7 From tactical weights to positions

The tactical asset allocation is a grid of segment weights. The game’s automatic allocation translates each segment weight into positions, by value weighting or equal weighting, and rebalances them to the tactical weights after each round unless you switch it off.

For the first rounds, leave this automation on. The decisions that matter are above it.

7.1 Automation preferences: the ESG floor

Automatic and benchmark portfolio preferences is where the ESG requirement of the ESG funds is set: Minimum criteria → ESG rating → A (or the numeric threshold the game uses for A). The filter removes every asset below the floor from the fund’s investable set, in the current allocation and in the benchmark portfolio.

Two things to check:

The Matches column. A warning sign means a segment has no asset that passes the filter; money allocated to that segment stays in cash. On this universe an A floor should pass in every equity segment; if it does not, lower the threshold one notch rather than leave cash.
The weighting. Value weighting for equities is the default and matches the way the strategic allocation split the equity book across markets by capitalisation. Keep it.

Why ESG binds here and not earlier

Ratings exist for equities only, and the market carries no ESG premium: the class-level statistics of station 1 are unchanged by the filter. What the filter costs is diversification inside each equity segment, which shows up as tracking error of the fund’s stock book against the segment line, not as a different strategic allocation. That is why the ESG funds’ strategic allocations differ from the others only by “no commodities” and by γ.

7.2 Asset-level decisions (optional)

Disabling Automatic current allocation opens the Markets page for asset-level decisions: the list of 180 assets with performance, benchmark weight, factor loadings, industry, maturity; each asset’s page with description, history, metrics and fundamentals. The Economic outlook’s Instrument performance subpage lets you enter an asset-level alpha if you expect a single asset to beat its segment.

Our advice: do not do it in the practice rounds or in round 1. Security selection on top of the tactical tilt adds a layer of tracking error that is hard to attribute later, and the automation already produces a sensible, diversified book. If you do it:

Keep the segment totals equal to the tactical weights, or the tactical decision is overwritten by the asset-level one.
Prefer deviations inside a segment (overweight one issuer, underweight another) to deviations across segments.
Write down the thesis per deviation; the Analyst page attributes by industry, maturity and factor, and you will want to recognise your own bets.

7.3 Analyzing the fundamentals

If you decide to deviate from the automatic weight of a single asset, you need a thesis. A thesis is not “the stock is cheap” or “it has done well recently.” A thesis is a statement about the company’s fundamentals that the market has not yet priced in. The asset page provides the fundamentals you need to form one.

You do not need to be an accountant. You need to look at three things: whether the earnings are real (quality of earnings), how safely the company is financed (solvency and liquidity), and whether the price already reflects the good news (relative valuation).

7.3.1 What the page gives you

Before running the analysis, it helps to know what data the game provides. The asset page contains much more than the ratios we cover here. The available fields are:

Asset information: Asset class, area, country, industry, home currency.
Performance metrics: Price, return over 3 months, 1 year and 5 years, market capitalization.
Factor loadings: Alpha, market beta, HML beta, MOM beta, RMW beta (both for the last round and long-term).
Other metrics: Sharpe ratio.
Fundamentals overview (up to five years): Earnings per share (EPS), price-to-earnings (P/E), return on equity (ROE), return on investment (ROI), debt-to-equity, dividend yield, free cash flow (FCF) per share, revenue, operating margin, current ratio.
ESG ratings (up to five years): Environmental, Social, Governance, and Overall scores.

The analysis below focuses on the three important checks for security selection: Quality of Earnings, Solvency and Liquidity, and Relative Valuation. Other common ratios, such as price-to-book (P/B), EV/EBITDA, PEG and interest coverage, are not on the page and not covered here. They are useful for specific sectors (P/B for banks, EV/EBITDA for capital-intensive businesses) and for comparing companies with different capital structures.

7.3.2 Quality of Earnings

EPS is accounting profit, and accounting profit can be managed. A company can report a rising EPS by booking revenues early, delaying expenses, or capitalizing costs that should be expensed. To know whether the company is actually generating value, you must check the quality of those earnings against the cash the company generates.

The game provides Free Cash Flow (FCF) and Earnings per Share (EPS), but not Cash Flow from Operations. The most direct quality check available is therefore the FCF-to-EPS ratio:

\[ \text{Earnings Quality} = \frac{\text{FCF per share}}{\text{EPS}} \]

A ratio near 1.0 means the company is generating enough free cash to back its reported profit. A ratio persistently below 1.0 (e.g., 0.4 or 0.6) is a red flag: the company is reporting earnings on paper but not generating the cash to back them up. This usually means it is spending heavily just to maintain its asset base (high capital expenditure), or it is not collecting its receivables. A ratio above 1.0 means the company is generating more cash than it reports in profit, which is generally a sign of conservative accounting.

Three checks tell you if the earnings are real:

FCF-to-EPS. The most direct test of whether reported profit is “real.” If FCF per share is persistently lower than EPS, the earnings are of low quality. Track the ratio over the years the page shows: a ratio that is improving is a better signal than a ratio that is high but falling.
ROI and ROE trends. A rising ROE might just mean the company is taking on more debt (since equity is the denominator). Check whether ROI, the return on all capital invested, moves in the same direction. If ROI is falling while ROE is rising, the profitability is an artifact of leverage, not a genuine improvement in the business. A healthy company shows both ROE and ROI rising together, or ROI rising faster than ROE.
EPS growth stability. Is the EPS growth steady, or jumping around? Stable growth is higher quality than volatile growth.

7.3.3 Solvency and Liquidity

Two ratios on the page describe the balance sheet, what the company owns and what it owes, and tell you if it can survive a bad year:

Current Ratio. Current assets divided by current liabilities. This measures whether the company has enough short-term assets to cover its short-term bills. A ratio below 1.0 is a warning sign: the company cannot pay what it owes in the next twelve months. A ratio rising from below 1.0 to above 1.0 is a strong sign of improving liquidity.
Debt-to-Equity (D/E). Total debt divided by shareholders’ equity. A high D/E means the company is highly leveraged. A falling D/E means it is paying down debt or growing equity, which reduces risk.

7.3.4 Relative Valuation

An absolute price-to-earnings (P/E) ratio tells you almost nothing. A P/E of 10 might be expensive for a slow-growing utility but cheap for a fast-growing tech company. You have to compare it to two benchmarks:

Its own history. Compare the current P/E to the company’s five-year average P/E. If the current P/E is much higher than its historical average, the stock is more expensive than it used to be. The market has re-rated it.
The market. Compare the current P/E to the market average. If the stock’s P/E is higher than the market, it is trading at a premium.

Applying the numbers: a worked example

Suppose you are looking at a European energy company (the numbers are invented). You read the page in three steps:

Quality of Earnings. EPS has grown from €1.20 to €4.00 over four years, which is strong. ROI is 16 %, comfortably above the cost of capital. Most importantly, FCF per share has turned from negative (−€0.40) to positive (€3.00). The FCF-to-EPS ratio is therefore \(3.00 / 4.00 = 0.75\): the company is generating 75 cents of free cash for every euro of reported profit. It is not a perfect 1.0, but the trend is strongly positive (the ratio was negative four years ago), and 0.75 is high enough to confirm the earnings are backed by cash.
Solvency and Liquidity. The current ratio has risen from 0.9 to 1.6. It is now comfortably above 1.0. D/E has fallen from 57 % to 31 %. The company has deleveraged and improved its short-term liquidity.
Relative Valuation. The current P/E is 12. The five-year average P/E is 6.5. The market average is, say, 15.
- Versus history: \(12 / 6.5 \approx 1.85\). The stock is almost twice as expensive as its own history.
- Versus market: \(12 / 15 = 0.8\). The stock is cheaper than the market.

The verdict. The fundamentals are clearly better than they were four years ago. The FCF-to-EPS ratio confirms the profit is real and backed by cash, the current ratio confirms the company can pay its bills, and the D/E confirms it is deleveraging. However, the stock has re-rated from a P/E of 6.5 to a P/E of 12. While it still trades below the broad market, it is nearly double its historical multiple. The market has already priced in the recovery. The thesis is “strong, high-quality fundamentals, but the valuation premium relative to its own history leaves no margin of safety.” That supports a neutral or underweight position, not because the company is weak, but because the price is full.

7.4 Deliverable of this step

For the ESG funds: the floor set and the Matches column clean. For all funds: a conscious decision that asset-level automation stays on (or a written list of asset-level deviations).