JWM 2006 Sector Rotation With Momentum

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Dynamic Asset Allocation Using
Systematic Sector Rotation
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is at the School of
Business, University of
New South Wales at the
Australian Defence Force
Academy, Campbell
ACT, Australia.
[e-mail]

SPRING 2006

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The article is organized as follows. We begin by reviewing the reference literature before introducing the concept and practice of dynamic sector rotation. We then present our experiment: to apply a number of heuristic techniques of sector momentum to a fully invested portfolio of sector-specific investments
(41 funds of the Fidelity Select Sector family, for which we have data). We first present the empirical results obtained using alternative measures of relative strength (rate of change, alpha, and MACD [moving average convergence divergence)] indicators) and subsequently expand our investment strategy to a portfolio composed of shares and cash. Our results do not take into account the capital gains tax regime of the country of the investor.
Hence, they do not illustrate the tax efficiency of strategies of systematic sector rotation, which may require the realization of significant shortterm net capital gains.

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MASSIMILIANO TANI

he financial markets downturn of
2000-2002 has tested a number of investment strategies and raised
(again) the question of whether one can devise a rule to achieve returns above market indices while protecting the capital invested. The results obtained by investment funds during 2000-2002 suggest that passive and semipassive investment strategies cannot protect investors against the negative effect of a prolonged period of poor economic conditions. At the same time, the alternative offered by active investment strategies, based on the idea of selecting specific stocks or asset classes, has obtained mixed results. Although real estate investment trusts (REITs) and funds specializing in precious metals have been able to maintain their value

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