In recent years sector rotation strategies, using the S&P 500 sectors, have struggled to outperform the index. In this post we are going to see how the index behaviour has changed compared to its sectors using our friends the monkey quants.

We assign random weights with monthly frequency to each of the nine traditional S&P 500 sectors (financial, health care, energy,…) starting from 1999. Additionally, in order to simulate the sector rotation strategy, we randomly remove some sectors from each recommendation. We carry out 50,000 random simulations and compare the returns of the monkey quants to the index performance using a 3 year rolling window.

Since 2013 the index is constantly above 50% of the monkeys and even reaches over 80% at times. From 2002 to 2011 the index was far below most of the monkeys using the sectors; on average below 85% of them (a rank of 15%).

In 2011 a change occurs in the index, making it more difficult to add value using the sectors and forcing us to rethink the sector rotation strategies.

Is there anyone in the room that can tell us why this is happening?

ϟ o‑o