Some industries or asset classes are more favored in a particular phase of an economic cycle. Depending on the prevailing economic situation of a period, financial market capital is moving from one sector of the economy or an asset class to another. This inevitably leads to an outperformance relative to the market in some industries and an underperformance in others.

The Sector Rotation strategy tries to capitalise on the notion that not all market industry sectors perform well at the same time. Basically, the strategy moves to sectors poised to benefit in each phase, improving returns relative to the market.

Relative strength strategies are a form of momentum investing as they seek the asset showing the strongest performance over a specific timeframe. The strong tend to get stronger, while the weak tend to get weaker. This makes sense because Wall Street loves its winners and hates its losers. Relative strength applied to industry sectors is a classic momentum investing application. Instead of employing expensive analysts crunching economic data, we simply follow an established trend for as long as it lasts before rotating into the next upcoming winner.

This is a high-risk/high-reward strategy. There will be bad months, perhaps even bad years. However, long-term evidence suggests that good times will outweigh bad ones. Utilities, health care, and consumer staples are defensive sectors showing outperformance in adverse equity market conditions. Combined with an added non-correlated asset class, the strategy has built-in protection against the downside by rotating to the best performing asset regardless of market conditions.

We use the Sector Rotation strategy in all our model portfolios, Defensive, Balanced and Offensive. We suggest an allocation of no more than 15% of a portfolio.