I've a lot of respect for Michael at Market Sci. Irrespective of the actual performance of the strategies on offer or blogged about, I have a lot of time for anyone prepared to put their record out there in public for all to see. It's relatively easy to research an idea, but showing its public forward performance is a different thing entirely.
So in the interests of sharing successes and failures, I thought it was high time I updated on the performance of my rotation model and the lessons I have learned.
The rotation model uses the excellent ETFRewind rotation tool.
My chosen markets were:
UK Mid cap (FTSE 250).
UK Index linked gilts
I used the Fidelity funds network platform which had free switching between funds. The model chosen was not the ideal model in theory and is limited by the choice of low cost funds available within ISA tax (UK tax exempt) wrappers.
Effectively the rotation model is either half mid cap/ half bonds or full bonds. The kicker is the choice of bond to accompany the equity component in a bull market. In theory the model will keep steady in bear markets and not under perform too much in bull markets.
I started following the model at the point of the vertical line.
The rotation model kept track with the benchmark until the Middle of August, after which the FTSE 250 took off with only a minor wobble with the resumption of the European sovereign crisis.
In theory, the model as returned roughly 7%, while the benchmark has returned over 20%.
So there is clear under performance since the summer. This is disappointing but not entirely unexpected, the aim was effectively mimic the performance of a 60/40 stock/ bonds portfolio with the greater stability of a 50/50 portfolio. In theory the model will rotate into the best choice bond for to accompany the equity component in a bull market to compensate for the mix being 50/50 instead of 60/40.
Unfortunately in real life my performance has been below this, returning 2% since inception - Why?
In my last few weeks in Canada we hiked the west coast trail on Vancouver Island for 7 days, then came back to find my laptop fried along with my stored fidelity network login details. My physical files were already in shipping back to the UK. So in the process of relocating back to the UK and waiting for my shipped files to arrive/ login details to be reposted, it was around 4 weeks before I was above to get back in the saddle. Unfortunately this coincided with missing a big switch into the FTSE250.
I've since discovered Dropbox which is a higher recommend backup and file sharing tool.
I hadn't modelled what to do in this situation - I.e. the impact of a 4 week delay on the weekly rotation model.
Should I have still switched into the FTSE250 and risk being late to the party as the trend reverses, or sit out and wait for the pullback?
Given the performance, I think you can guess which course I took!
In retrospect this was evidently not the best course of action. There are however a number of lessons I have learned.
- A rotation model is about relative strength so waiting for pullbacks may not be the best option if a switch is missed.
- Fidelity's on-line platform switches you out of a fund almost instantly, but can take up to a week to switch you back in again.
- Unfortunately the choice of funds and ETFs is limited in the UK compared to the US. Costs and transaction fees are unfortunately also higher, making some switching strategies inaccessible or too costly.
- There are potential ways around this though such as changing the time horizon or using different vehicles for different assets. (E.g. Funds within an ISA for equities/ bonds, but use spread betting for gold).
- I intend to continue with the rotation model, but will pull out some funds to put more into a PE/10 value based strategy.
I hope post if of use. I shall update in another 6 months.