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The Spectrum researches.
The researches carried out by the mutual fund
company Spectrum have enabled the validation of its "winner
persistence" strategy on historical stock exchange data. As far as
the industrial sectors are concerned, they used the TSE 300 monthly
yields and the yields of its 14 sectorial indexes. The tested model
consisted in comparing the return of a portfolio holding the 7 "
winner" sectors of the TSE (those with the best momentum) with the
return of a portfolio holding the 7 "losers" sectors known
(those with worse the momentum). The winner portfolio was holding the 7
sectorial indexes which had recorded the best returns for the last 12
months, while the loser portfolio was holding the 7 sectorial indices
which had known the worst returns for the last 12 months.
Surprisingly, these winner and loser
portfolios were not hold during 6 months or a year before being
modified. The Spectrum strategists had preferred to adjust the
portfolios once a month, with respect to the performance of each index
over the last 12 trailing months. The results are all the same
interesting, more especially as they refer to nearly 40 years of
stock exchange history, from 1963 to 2000. During all this period,
the 7 winner sectors portfolio has recorded an average annual yield of
15,1 %, against 8,5 % for the 7 loser sectors portfolio and 10,9 % for
the TSE 300.
As I mentioned above, the Spectrum
Tactonics funds rely on the winner persistence at the sectorial
level, at the national stock exchange markets level and at the
management styles level. In order to have an overview of the
historical yield of such an integrated strategy, the Spectrum
strategists have used 18 American indexes related to the industrial
sectors and the investment styles, and 6 indexes representing the
countries. The winner and loser portfolios consisted of 12 indexes
each, distributed according to their performance over the 12 more
recent months and subjected to monthly adjustments. Because of the
limits imposed by the availability of the stock exchange data bases,
the validation could be made only over a very shortened period, going
from 1994 to 2000.
The portfolio holding the 12 winner indexes had
generated, over this period, an average annual yield of 17,2 %,
against 10,5 % for the portfolio holding the 12 loser indexes and 14,3 % for
the MSCI World index. Although there is no perfect benchmark index for
this type of portfolio, the Spectrum strategists had chosen the
objective to exceed the MSCI World index.
The philosophy of the Spectrum Tactonics funds does not only rely on the winner persistence of the indexes.
It uses a rather nebulous risk measurement which generates a sale
signal when "the yield of a market or a sector exceeds the expected
yield in the long term and this, using two standard deviations". By
using this indicator, it would be possible to add 1 to 2 percents to
the annualized yield of the portfolio.
The Spectrum validation study is
extremely informative, in particular because it confirms the winner
persistence within the sectorial indexes of the Toronto Stock Exchange.
The phenomenon of sectorial momentum that American academics have
recently discovered in the United States also seems to exist in
Canada. When we will have access to enough ETF representing the
sectorial sub-indexes of the Canadian economy (for the moment, they are
only 2 or 3 of them), an investment strategy based on the sectorial
winner persistence could be very attractive and lucrative.
The product offered by Spectrum is
certainly interesting and innovative. However, nothing prevents an
investor from applying, by his own means, a winner persistence
strategy. It is then enough to buy directly ETF rather than to invest
in a fund of funds. As it is demonstrated by the university research,
it is sufficient to buy the 4 or 5 best performer ETF of the last 12
months to have a gaining strategy, and to only make the necessary
adjustments once a year.
André Gosselin
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