Insights
Q2 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 allocates mostly to real estate as well as materials this month, due to strong investor flows (in particular real estate) as well as materials (strong overall momentum).
- Real estate also saw strong analyst upward revisions.
- Health care continued to see an underweight due to poor flows and average fundamentals.
- On a YTD basis, the SSRM US strategy continued to outperform the benchmark both on an absolute and risk-adjusted basis.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 – April 2021 vs. May 2021
Source: State Street Global Advisors, as of June 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 June 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
Europe Sector Allocation
- The SSRM Europe strategy has seen significant retrenchment with a strong move into cash, due primarily to a lack of momentum in sectors.
- Momentum continues to represent the most important pillar in the SSRM Europe, compared to fundamentals and economics.
- The SSRM Europe has underperformed the benchmark so far this year due to a lack of clear market direction and also because the strategy did not overweight outperforming sectors, such as consumer discretionary.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 – April 2021 vs. May 2021
Source: State Street Global Advisors, as of June 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 June 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
World Sector Allocation
- The SSRM world strategy had a strong overweight in consumer discretionary primarily due to strong 12-month momentum and inflows compared to other sectors.
- From a fundamentals standpoint, consumer discretionary also saw strong upward analyst revisions.
- The world strategy has underperformed so far this year because, despite strong investor flows and reasonably healthy fundamentals, the consumer discretionary sector has not met return expectations. The strategy also maintained an underweight in sectors such as finance and energy, which have seen strong performance in recent months.
Performance of SSRM vs. Benchmark
Source: State Street Global Advisors, Bloomberg Finance L.P., as of June 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 June 2021. Sector selection is based on the methodology Sector Rotation: Can the Approach Work in Different Countries?
*Key: Over-/Underweight (versus corresponding benchmark)
