We first use a fundamental approach to identify sectors of the U.S. and international economies which likely have a significant advantage or disadvantage in the current environment. Simply eliminating unfavorable sectors and diversifying among the rest is usually a better strategy than simply investing in the index(es). The beauty of the approach is being wrong may result in lost opportunity but not in a loss of money. But very often, identifying an unfavorable sector is fairly obvious, with a high probability of being correct. Such as, if mortgage rates jumped to 12%, eliminating homebuilders and mortgage companies from the portfolio, while diversifying in the remainder of the market, would likely result in a higher return than investing in the entire market. There are many examples, sometimes due to interest rate changes, new taxes, government regulations, or other market conditions.
It is important to understand that Sector Rotation is not possible when managing hundreds of billions or trillions of dollars. That is most certainly why large Broker/Dealers do not talk of it – they simply manage too much money to sell out of a sector or to overweight one which may be favored in the current environment.
Another advantage we have over the broad indexes (such as the S&P 500), is that we use a similarly weighted approach. For example, if we liked Apple and Southwest Airlines, out of $10,000, we might allocate about $5,000 to each. The index would allocate over $9,400 to Apple and less than $400 to Southwest, making Southwest near meaningless to your portfolio. Equal weighting and earnings-weighted portfolios have generated higher returns than the traditional cap-weighted indexes over the last one, three, and five years. Also, in all three periods the Sharpe Ratios (risk adjusted returns) were higher too. Hence, the higher returns were achieved with lower volatility.
Disclosure: Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Frank Beck & Beck Capital Management explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors. The investment products discussed herein are considered complex investment products. Such products contain unique risks, terms, conditions and fees specific to each offering. Depending upon the particular product, risks include, but are not limited to, issuer credit risk, liquidity risk, market risk, the performance of an underlying derivative financial instrument, formula or strategy. Return of principal is not guaranteed above FDIC insurance limits and is subject to the creditworthiness of the issuer. You should not purchase an investment product or make an investment recommendation to a customer until you have read the specific offering documentation and understand the specific investment terms and risks of such investment.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.