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Q3 Update: Sector Selection Research Model


Below readers can find commentary on the key changes to our Sector Selection Research Model (SSRM) across US, Europe and World sectors. This is done as an update to the thought leadership piece we published on Sector Rotation: Can the Approach Work in Different Countries?

As a reminder, the SSRM deploys a rule-based, sector rotation approach that targets the most relatively attractive sectors using a blend of price, macroeconomic and fundamental factors. The importance of these selection factors is captured in the dynamic weighting scheme of the research model.

Furthermore, the model provides for a mechanism that ensures risk is controlled and opportunities arising from dispersion are seized. In all, the approach comprises two major steps: sector selection and sector weighting.

US Sector Allocation

  • The strategy had an overweight in Materials and Consumer Discretionary, thanks to strong momentum (both price action and flows).
  • Consumer Discretionary also scored highly on the macroeconomic factor. 
  • The underperformance of SSRM versus the benchmark was largely due to an underweight of Technology and Materials in May and Consumer Discretionary in July.

Performance of SSRM vs. Benchmark

  US Sector Selection Research model (NTR) S&P 500 (NTR) Difference
MTD Return 4.3% 7.1% -2.9%
YTD Return 9.2% 11.4% -2.2%
Rolling 1 Year Return 17.5% 21.9% -4.4%
Rolling 1 Year Risk 19.9% 22.0% -

Source: State Street Global Advisors, Bloomberg Finance L.P., as of September 2020. Past performance is no guarantee of future results. It is not possible to invest directly into an index. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Returns do not represent those of the Portfolios but were achieved by mathematically combining the actual performance data of the sector indices that make up the S&P 500 Index, based on the methodology in the research paper: Sector rotation: Can it work in different countries? The performance does not include costs, so actual results will differ

SSRM Sector Allocation – August 2020 vs. September 2020

Source: State Street Global Advisors, as of September 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?

Source: State Street Global Advisors, as of September 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?

Europe Sector Allocation

  • The strategy is overweight Utilities and Materials due to high momentum, driven by both price action and investor flows. (Momentum currently has 58% weight in the SSRM Europe Model).
  • The overweight in Utilities was also because of strong fundamentals, primarily due to analyst upgrades.
  • Health Care had the highest overweight in the previous update but turned underweight in this update because of poor momentum and lacklustre fundamentals.

Performance of SSRM vs. Benchmark

  Europe Sector Selection Research model (NTR) MSCI Europe (NTR) Difference
MTD Return 1.8% 2.9% -1.1%
YTD Return 2.7% -10.4% 13.1%
Rolling 1 Year Return 12.2% -1.0% 13.2%
Rolling 1 Year Risk 15.0% 19.3% -

Source: State Street Global Advisors, Bloomberg Finance L.P., as of September 2020. Past performance is no guarantee of future results. It is not possible to invest directly into an index. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Returns do not represent those of the Portfolios but were achieved by mathematically combining the actual performance data of the sector indices that make up the MSCI Europe Index, based on the methodology in the research paper: Sector rotation: Can it work in different countries? The performance does not include costs, so actual results will differ.

SSRM Sector Allocation – August 2020 vs. September 2020

Source: State Street Global Advisors, as of September2020. Sector selection is based on the methodology in the paper, Sector Rotation: Can the Approach Work in Different Countries?

Source: State Street Global Advisors, as of September 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?

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World Sector Allocation

  • World Materials and Consumer Discretionary enjoy a strong overweight by virtue of their strong momentum (both price action and investor flows).
  • Neither Materials nor Consumer Discretionary enjoyed strong fundamentals. 
  • World Technology and Health Care, just like US Technology and Health Care, suffer from weak fundamentals and investor outflows.

Performance of SSRM vs. Benchmark

  World Sector Selection Research model (NTR) MSCI World (NTR) Difference
MTD Return 5.0% 6.7% -1.6%
YTD Return 16.5% 7.6%  9.0%
Rolling 1 Year Return 25.0% 18.0% 7.0%
Rolling 1 Year Risk 19.0% 21.6% -

Source: State Street Global Advisors, Bloomberg Finance L.P., as of September 2020. Past performance is no guarantee of future results. It is not possible to invest directly into an index. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Returns do not represent those of the Portfolios but were achieved by mathematically combining the actual performance data of the sector indices that make up the MSCI World Index, based on the methodology in the research paper: Sector Rotation: Can it Work in Different Countries? The performance does not include costs, so actual results will differ.

SSRM Sector Allocation – August 2020 vs. September 2020

Source: State Street Global Advisors, as of September 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?

Source: State Street Global Advisors, as of September 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?