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FSI Sector Allocation

ETF Driven Strategy

Brian Rauscher

Head of Global Portfolio Strategy & Asset Allocation

Brian Rauscher

Brian Rauscher is a Managing Director and Head of Global Portfolio Strategy and Asset Allocation at FSInsight. He joined Robert W. Baird & Co. as Chief Portfolio Strategist in 2012 after 15 years on Wall Street. He has also worked on the buy side as the U.S. Equity Strategist at Fortress Investment Group on the Liquid Macro Fund. From 2004-2009, Rauscher was at Brown Brothers Harriman as the Director of Portfolio Strategy and Director of Research. Prior to that, he worked for five years as an investment strategist on the team of Wall Street legend Byron Wien, at Morgan Stanley.

What is the FSI Sector Allocation?

The S&P 500 index is comprised of 11 Sectors (GICS Level-1). An investor that buys an S&P 500 ETF (ex. SPY) or an S&P index fund is essentially gaining exposure to all 11 sectors according to each sector’s respective weighting in the index.

The goal of the FSI Sector Allocation is to outperform the S&P 500 by actively managing one’s sector exposures without taking on additional portfolio risk.

This strategy seeks to increase alpha and lower risk by investing in those sectors of the S&P 500 that should Outperform, while cutting exposure to the sectors that should Underperform. This balancing should help deliver more profits in a bull market and reduce losses in a bear market.

We will review and rebalance the sector allocations on a monthly basis. Additionally, we may provide relevant articles that impact our market views during the month.

Profits to the Brave! Lets get started!

What is Actively Managing Sector Exposure?

One can replicate the S&P 500’s performance by buying the individual sector ETFs in the same weights in which they occur in the benchmark. An actively managed approach does NOT own the sectors that are expected to underperform the Index, but rather allocates their weights to the sectors that are forecasted to outperform. Our view is:

Why own the losers if you don’t have to?

The challenge is determining which sectors will be the leaders and which will be the laggards.

For most, this is a challenging exercise, and many have given up trying to play this game, which is why so many advocate just buying the overall S&P 500 ETF. However, the FSI Sector Allocation is built upon a proprietary process that has successfully been identifying the winners and losers for institutional clients for over 20 years and we are now making it available to our retail clients.

Methodology behind the FSI Sector Allocation

Communication Services
ETF: XLC
Consumer Discretionary
ETF: XLY
Consumer Staples
ETF: XLP
Energy
ETF: XLE
Financials
ETF: XLF
Health Care
ETF: XLV
Industrials
ETF: XLI
Information Technology
ETF: XLK
Materials
ETF: XLB
Real Estate
ETF: XLRE
Utilities
ETF: XLU

As shown, we have included the 11 Sectors (GICS L-1) that constitute the S&P 500. Our methodology has three layers of analytics that are used to determine the favorability/unfavorability of each respective sector

1. Sector Macro/8-panel analysis

Our proprietary 8-panel analysis is a key piece of information for new idea generation in our investment recommendation process. It provides a subjective, but disciplined, assessment of reward and risk by examining earnings estimate revisions through the use of our ASM indicator, valuation, and price reversion for sectors (GICS L-1), industries (GICS L-3), and sub-industries (GICS L-4) versus the market or its peers to predict 9-18 month relative performance.

  • Analyst Sentiment Measure (ASM)*: Our ASM indicator is a proprietary measure of relative earnings estimate revisions at the sector/sub-industry levels and is the most important input for the majority of our investment recommendations. It is both a momentum and contrarian tool depending on its level relative to the previous two decades.
  • Valuation: We view valuation as a measure of potential risk, and its importance comes from its current reading compared with levels at major historical relative performance inflections.
  • Price Reversion Oscillators (PRO): Based on our analysis, the synthesis of three distinct time duration price oscillators (short, medium, and long term) is an invaluable analytical technique for measuring price reversion.

2. Intra-Sector Macro/8-panel analysis

After evaluating the different sectors, we proceed to compare them among each other. We analyse their relative strengths and weaknesses between each other and draw conclusions from them.

3. Deep dive into the largest individual stocks within the Sector using our proprietary single stock ERM model ( Earnings Revision Model ).

Our proprietary ERM model is our single stock quantitative selection model. We use it to determine the strength of the largest stocks within each Sector. The ERM takes looks at 5 primary indicators when evaluating each asset:

  • Price Performance
  • Earnings Estimate Revisions — Breadth
  • Earnings Estimate Revisions — Magnitude
  • Price Momentum
  • Valuation
Outperform

An Outperform signal for a sector indicates that we advise an OVERWEIGHT benchmark weighting. An Outperform signal for a sector is a combination of a positively sloped earnings revisions indicator, which we call Analyst Sentiment Measure (ASM), attractive valuation, and supportive readings from our proprietary indicators, which help with entry/exit points. If an Overweight signal has been provided by our methodology, the sector is forecasted to outperform the overall S&P 500 index.

Neutral

A Neutral signal for a sector indicates that we advise an EQUAL benchmark weighting. A Neutral signal occurs when our key indicators are mixed, therefore, a high conviction view is not warranted. If a Neutral signal has been provided by our methodology, the sector is forecasted to perform in-line with the overall markert.

Underperform

An Underperform signal for a sector indicates that we advise a ZERO benchmark weighting. An Underperform signal is a combination of a negatively sloped earnings revisions indicator (ASM), unattractive valuation, and negative readings from our proprietary indicators. If an Underperform signal has been provided by our methodology, the sector is forecasted underperform the overall S&P 500 index.

Selection Process

The FSI Sector Allocation weightings versus the S&P index that were derived by our proprietary process will be shown here. We determine if every sector should be Outperform, Neutral, or Underperform and then calculate what its monthly target weight for investors should be. This will then be translated into an implementation strategy using the 11 S&P Sector SPDRs, which are ETFs that are designed to mirror the performance of their respective S&P 500 sector.

ETF selection process

Conclusion and Next Steps

Now that we have explained the overall process of how our FSI Sector Allocation strategy works, the next steps are to understand how to track the performance and how to keep up to date on the most current recommendations. Our overall strategy performance can be found here: FSI Sector Allocation Performance page.

You can also dive deeper into each individual sector to understand which industries (GICS L-4) each sector is comprised of. Furthermore, you can understand the constituents of each industry by drilling down to the individual stock level. All of this can be found on our FSI Sector Allocation Data Sheet within in our Deep Dive into the Sectors Page.

Learn more about the industries and stocks that comprise each Sector

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