Investment Strategy: AlphaSolutions Sector Rotation Model - YouTube

Hello my name is Tim Newell, managing director,

and one of our senior portfolio managers here at Harvest Investment Services.

Many of our AlphaSolutions Models are

Rules based Tactical Models that have proven out-performance in both up markets and in down.

Today, we're going to look at our AlphaSolutions Sector Rotation strategy

in order to better understand how we used rules based models

with downside risk controls built into the models

The S&P 500, which is 500

of the largest companies in the United States, has ten different sectors - that it gives exposure to.

So in other words, each and every stock that is in the S&P

500 would fall into one of the 10 sectors of the S&P

For example, Apple would fall into the technology sector.

Exxon Mobil would fall into the energy sector.

Verizon would fall into the telecommunication sector, etc.

What we do with the AlphaSolutions sector rotation strategy,

is that we analyze the performance of all 10 sectors of the S&P,

and the four of the 10 sectors that are delivering

the greatest performance - the sectors that are giving us the greatest momentum -

are positioned into the portfolio.

So in other words, if there is a sector that is underperforming,

we would sell that sector, and replace it with a new sector that moved into

the top four performing sectors of the S&P 500.

So the best way for us to understand how the sector rotation strategy works

is for us to look at a given year. Let's start by looking here at 2010.

As you can see on this chart in January 2010,

the four top performing sectors that we would have invested in

were technology, telecommunications, industrials,

and health care. We were in these top four sectors,

not because we are projecting or forecasting

that these would be the best sectors to be in. We were in these sectors

because the rules of the model look at the performance

for the previous month, and position into the top four performing sectors.

We would utilize up to four

exchange-traded funds - also known as ETS -

that we're delivering the greatest performance

or delivering the greatest momentum each and every month,

and then every month we would rotate out of and back into

the top four performing sectors of the S&P

using these ETFs. We get to the end of May of 2010,

and now all 10 sectors of the S&P are underperforming.

They're all going negative. So for the month of June in 2010,

we did not invest in any of the sectors but instead

we reallocated to cash or money market,

because cash was ranked higher than that of all 10 sectors of the S&P.

We get to the end of the month of June, and all 10 sectors of the S&P are still

underperforming, or what we consider to be trended out.

So for the third quarter of 2010,

the rules of the model called for us to be in bonds, because

all 10 sectors of the S&P were underperforming.

by the end of the third quarter, market started to turn,

and once again we had four sectors that were trended in,

and were delivering positive performance. So the four sectors that we

invested in

for the month of October would have been basic materials,

telecommunications, utilities, and consumer cyclicals.

We continued the rotation strategy throughout the fourth quarter because

markets remained trended in.

If we look at 2011, you can see that we continued this sector rotation,

being invested 25 percent in each of the top

four performing sectors each month. Markets remained trended in

through the first half of 2011, however when we get to the end of the month of June,

we find that all 10 sectors of the S&P

were once again trended out and delivering negative performance.

So the rules of the model called for us to be in bonds

throughout the full third quarter and even through the fourth quarter.

All 10 sectors of the S&P remain trended out

as did the broad-market for the full second half the year.

So here you can see during these two calendar years -

not only the momentum participation of the sectors that are

delivering the greatest performance in any given month during bull market

periods, where markets are trended in -

but you can also see how we have downside risk controls built into the

rules of this model

that move us to cash or to bonds during

bear markets, or declining market periods.

Well at this point you may be saying,

"Well, this rules-based approach sounds interesting, but does it really work?"

Let's take a look at the performance page of our fact sheet,

to explore the answer to that question.

So as you can see,

the top of this chart illustrates the performance

of this model, which has dramatically outperformed the S&P

over the long term time horizon. If you look at the year by year

historic returns, you'll see there are a number of years that the rules of the model delivered significant

outperformance over the S&P, such as here in 2011.

You can also see

there are years where the downside risk controls cause the model to underperform the S&P,

such as here in 2012. It's important to note that this model

is not dependent upon our ability to predict or forecast the broad market

or the individual sectors of the market. This model is based purely upon the

rules of the model, and the downside risk controls that are built into those rules

to help us to avoid those major market declines that markets will

inevitably go through, such as the two major declines that the market has seen

in excess of fifty-percent since the year 2000.

Which brings us to one of the final points we'd like to cover

as it relates to this sector rotation strategy.

So one of the ways that we can measure risk in an investment

is looking at the beta rating. The S&P 500 has a beta rating of 1.00

So any time an investment has a beta rating greater

than 1.00, we would say that the risk of that investment is

actually greater than the S&P.

For example, if I have a mutual fund that has a beta rating

of 1.2 that would mean that I have a fund that's taking on twenty percent greater

risk than that of the broad-market.

Or if I have a mutual fund that has a beta rating of 1.5

I'm taking on 50 percent greater risk than the broad market.

Is it reasonable to assume that if I'm using a mutual fund or an investment that has

a much greater risk - a higher beta rating than that of the broad-market -

that I should be able to get a higher return? Sounds reasonable.

And yet sadly enough, most investments that have a higher beta rating than the broad market

significantly trail the returns of the broad market

even though they're taking on much higher risk. In the sector rotation model

we have a beta rating (or, risk rating) that is much less than that of the broad market

In fact, the current beta rating of the sector rotation strategy - as you can see

in the fact sheet - is less than a third

of that of the broad market.

So in other words, this model is only taking on about 30 percent of the risk

of the broad market, and yet this rules based sector rotation strategy

has significantly outperformed the performance of the S&P over the long haul.

The bottom section of this chart

illustrates the max drawdown, or the downside volatility,

where the markets fell approximately 55 percent from the fall of 2007

to the spring of 2009. On this chart you have the max drawdown of the S&P depicted in dark grey,

as compared to the max drawdown

of this sector rotation model, illustrated in blue.

When you see the vast difference between the drawdown

(or, the losses) that the typical buy-and-hold investor experienced,

compared to the minimal losses of the sector rotation strategy,

you should be able to draw the conclusion that there's a better way

than the buy-and-hold approach that's been used in your portfolio up till now.

Hopefully this helps you to better understand

our Alpha Solutions sector rotation strategy.

For more information on this sector rotation strategy,

or any of our other Alpha Solutions models, you can view the fact sheets on our website,

or speak to your investment advisor about how this model (or any other models)

could fit into your overall investment portfolio.

Thank you.