Q1 Update: Sector Selection Research Model
On a quarterly basis, we provide an update on our Sector Selection Research Model. Read on to learn more about recent US, Europe and World sector allocations based on price, macroeconomic and fundamental factors.
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 Materials this month, due to the highest flows witnessed by the sector and given strong 12-month momentum. Momentum continues to have the highest weight in SSRM. Materials also witnessed the highest earnings revision sentiment.
- Utilities saw a slight overweight by virtue of stronger earnings revision sentiment and profit margin.
- The underperformance of the US SSRM this month was mainly due to underweights in Energy and Financials, which saw strong performance. The SSRM’s allocation to Utilities (worst performing sector) also resulted in loss.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of March 2021. 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 – January 2021 vs. February 2021
Source: State Street Global Advisors, as of March 2021. 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 March 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
Europe Sector Allocation
- The Strategy was slightly overweight in Consumer Discretionary and Financials mainly due to strong flows in the two sectors, as well as due to strong 12-month momentum in Consumer Discretionary.
- Consumer Discretionary also had a strong profit margin, whereas Financials had strong earnings revision sentiment.
- The slight overweight in Utilities was due to the highest earnings revision sentiment the sector witnessed compared to all the other sectors.
- The underweight to Consumer Staples was mainly due to lack of 12-month momentum and earnings revision sentiment.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of March 2021. 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 – January 2021 vs. February 2021
Source: State Street Global Advisors, as of March 2021. 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 March 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
World Sector Allocation
- The Strategy had a strong overweight in Consumer Discretionary primarily due to strong 12-month momentum and modest flows and ROE compared to other sectors.
- Materials had a slight overweight thanks to strong 12-month momentum and flows. Tech was underweight mainly due to the least amount of flows witnessed by the sector.
- Like the US SSRM, the World SSRM strategy underweighted Energy and Financials sectors, which were the best performers last month. The underperformance of the strategy was also due to a slight overweight in Utilities, the worst performing sector in the last month.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of March 2021. 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 – January 2021 vs. February 2021
Source: State Street Global Advisors, as of March 2021. 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 March 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
*Key: Over-/Underweight (versus corresponding benchmark)
