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Q2 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
- Compared to previous months, price momentum has suffered severely and no single sector enjoys strong momentum, as defined by SSRM. For this reason, SSRM has mostly allocated into cash for the month.
- IT, which has been the beneficiary of strong momentum and fundamentals in previous months, has begun to falter. There is a small investment outflow from the sector and the rate of analyst downgrades has also exceeded the rate of upgrades.
- Active positioning in other sectors is generally light.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 – June 2020 vs. May 2020
Source: State Street Global Advisors, as of June 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
Source: State Street Global Advisors, as of June 2020. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
Europe Sector Allocation
- The SSRM sector selections for Europe are similar between last month and this month.
- The European healthcare sector continues to enjoy a significant overweight, thanks to strong momentum (both price action as well as investor flows) and increasingly solid fundamentals.
- SSRM continues not to favour European financials as trailing fundamentals remain weak and momentum of the sector continues to falter.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 – June 2020 vs. May 2020
Source: State Street Global Advisors, as of June 2020. 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 June 2020. Sector selection is based on the methodology in the paper, Sector Rotation: Can the Approach Work in Different Countries?
World Sector Allocation
The SSRM world sector selections are broadly similar between last month and this month, with the exception of Communication Services and Health Care
World Communication Services enjoys a strong overweight by virtue of the sector’s strong momentum (both price action and investor flows).
World Financials, just like Europe Financials, suffers from weak fundamentals and investor outflows.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 – June 2020 vs. May 2020
Source: State Street Global Advisors, as of June 2020. 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 June 2020. Sector selection is based on the methodology in the paper, Sector Rotation: Can the Approach Work in Different Countries?
*Key: Over-/Underweight (versus corresponding benchmark)
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