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Q4 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 allocated mostly to cash this month due to the lack of momentum in sectors (negative flows and/or negative 12-month momentum). With a 70% weighting, Momentum is still the most important pillar in the SSRM.
  • Utilities saw a slight overweight by virtue of stronger earnings revision sentiment 
  • The underperformance of the US SSRM this month was mainly due to an underweight in Financials, which saw significant positive performance (17%) in November.

Performance of SSRM vs. Benchmark

Source: State Street Global Advisors, Bloomberg Finance L.P., as of December 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 – November 2020 vs. December 2020

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

Research Model Allocation Decisions - Current Month (*)

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

Europe Sector Allocation

  • Similar to the US SSRM, the Europe SSRM allocated mostly to cash this month due to the lack of momentum in sectors
  • Real Estate saw a slight overweight mainly as a result of stronger macroeconomic signals.
  • The underweight in Financials in the SSRM Europe strategy led to underperformance against the benchmark because Financials rebounded strongly (25%) in November.
  • Momentum in Financials remained weak because the sector suffered from poor 12-month momentum, even though it had strong investor flows in November. Fundamentals were equally weak.

Performance of SSRM vs. Benchmark

Source: State Street Global Advisors, Bloomberg Finance L.P., as of December 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 – November 2020 vs. December 2020

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

Research Model Allocation Decisions - Current Month (*)

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

World Sector Allocation

  • Similar to the US and Europe SSRM models, the World SSRM allocated mostly to cash this month, due to the lack of momentum in sectors.
  • The Materials sector had a roughly neutral weight thanks to strong fundamentals (primarily due to analyst upgrades).
  • Like both the US and Europe SSRM, the World SSRM strategy underweighted Financials, which was the best performing sector in November (19%).

Performance of SSRM vs. Benchmark

Source: State Street Global Advisors, Bloomberg Finance L.P., as of December 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 – November 2020 vs. December 2020

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

Research Model Allocation Decisions - Current Month (*)

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

*Key: Over-/Underweight (versus corresponding benchmark)