Recently I was reading an article by Meb Faber on Tactical Allocation approach to Equity investing using the Sector Rotation model. This approach takes a short to medium term view that complements a long term asset allocation strategy. We tried to apply this to the Indian equity markets.
In this approach, the top "X" sectors (could be top 1, 2 3 etc) which have shown good performance over recent 1 / 3 / 6 / 12 month period are identified and ranked and the portfolio is split across the top "X" sectors.
Let's say we choose the "Top 3" sectors. The money is equally allocated @33.33% across the Top 3 sectors. The portfolio is re-balanced every month. If at the end of a month, a currently allocated sector falls out of top 3, the money is taken out of that sector and invested into the new sector that has come into to Top 3.
For simplicity of illustration, we have taken the last 1 year performance of each sector using the respective sector indices. We have calculated the 1 week and 1/3/6/12 month rankings in terms of returns of each sector indices. We have taken an overall ranking (by summing 1 Week and 1/3/6/12 month rankings and further ranked the top 3 sectors.
It is assumed the funds were invested in these 3 sectors in equal proportion, for the purpose of this illustration.
We have created a simple worksheet to illustrate it. We have taken all BSE Sector indices and ranked them in terms of 1/3/6/12 month performance. We have also added a 1 Week performance as an additional parameter. he top 3 for each time period is shown in highlighted color. The overall rank of each time period is totalled and the overall ranking is shown in the last column to the right.
For e.g., as date, the top 3 sectors (on a 1 Month ranking basis) to invest the funds are banking, power and metals.
Also you can see over the last 1 year, how the rankings have shifted across sectors as you move to more recent time periods. The momentum investing gives weightage to more recent performing (aka Virat Kohli) as opposed to those who had performed well earlier, but are no loner in "form" (to use a cricket analogy!!)
One can implement this approach by investing in the respective index or etfs tracking the relevant sectors. This is also useful if one wishes to shuffle the portfolio and reallocate funds to sectoral funds which are often cyclical in nature, so as to catch the wave and surf ahead.
Click here to View Live Worksheet