It is an observable fact that as an economy moves forward, different sectors of the economy tend to dominate and perform better than others. Even within these sectors different industries or industry groups can perform better than others.

The performance of these sectors and industries can be a factor of the stage of the business cycle, the time of year or attributed to the fact that they are members of specific economic regions in different parts of the world, e.g. USA, Asia Pacific or Europe.

Why implement a sector rotation strategy

Using a top-down approach, SMSF managers can develop a forecast of the economy, followed by an assessment of which sectors and which industries hold the most potential for growth in the near term. Once he has identifyied the strongest sectors and industry groups, the SMSF manager needs to select those companies to buy that are within the strongest sectors and industry groups. If managers are seeking overseas exposure this can be easily done by trading a variety of Exchange Traded Funds that are readily available on exchanges in the USA representing all GICS Level 1 sectors and most GICS Level 2 industry groups. We use these concepts extensively in our Momentum Investment Course.

Sector rotation strategies require an active management role on the part of the SMSF manager, mixing a long term investment horizon with the short term ability in selecting dominant and growing sectors at the right time. Markets tend to act as a discounting mechanism, often operating up to six months prior to the sector growth in the underlying economy. The skill required is more than just a buy and hold approach. The active manager needs to identify and buy sectors coming into favour (accumulation phases) and sell sectors that are showing signs of exhaustion (distribution phases.)

Sector Rotation Strategy Styles

There are a number of well documented sector rotation strategies, one of which is a new approach offered by Options21.

Style 1: The economic cycle strategy

Managers invest in particular sectors as dictated by the stage of the economy. The rotation from one sector to another is directed by the stage of the economic cycle.

Style 2: The calendar strategy

The calendar strategy looks at exploiting different sectors at different times of the year. Such as retailing at Christmas or sectors related to petroleum production in time of seasonal peak demand.

Style 3: The geographic strategy

A geographic inspired strategy would involve identifying the strongest sectors within an economy or region and gaining exposure to those areas of the market, for example China and property.

Style 4: The relative performance strategy

How a company’s stock price fares relative to its peers (or relevant asset group) is referred to as relative performance strategy. For more information in this strategy and on how Options21 is implementing and offering this strategy as a service, please visit the Relative Performance Strategy page.