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A low drawdown strategy for sector rotation for Fidelity Select Funds

|Includes: iShares 20+ Year Treasury Bond ETF (TLT)

Fidelity Select funds provide a comprehensive basket of investment vehicles for trading using sector rotation strategies. Due to the size of the basket and the fact that there are no transaction costs if the funds are held for sufficiently long periods, there are quite a few free and for-fee services that provide advice on periodic rotation in this basket, and some of them yield excellent returns, though not without large drawdowns.

The following strategy works quite well in backtesting, somewhat better than many other methods.

  1. Start from the close of the first full week of the year.
  2. Rank the performance of the funds during the period of 8 weeks ending on the close of the previous week.
  3. If the top ranked fund in step two has better return than a long term treasury fund , invest in it for 13 weeks, otherwise invest in the treasury fund for 13 weeks. (For backtesting we used VUSTX for pre 2003 years, and VUSTX and TLT for 2003 and later. These can also be substituted by the more recent Fidelity fund FLBIX.)
  4. Repeat steps 1 to 3 for the whole year, closing out the position in the last week of the year.
  5. Repeat the steps 1 to 4 for every year.

Backtesting yields the following results for the period 1991-2011 (All results are based upon the weekly adjusted close data from I will be glad to collaborate if a reader wants to repeat the calculations with data that he thinks to be more reliable.):
  • CAGR 25%
  • Number of years of losses: 2 (out of 21, in 1994 and 1998)
  • Maximum loss: -11% (in 1994).
  • Standard Deviation of Annual Returns: 22%
  • Mean of Annual Returns: 27%
  • 1, 3, 5, and 10 Year CAGRs: 4%, 27%, 24%, 28%
  • 2011 Return: 4%
  • Number of years the strategy beats SP500 index: 17 (out of 21).
  • Mean of positive returns: 28%
  • Mean of negative returns: -1%
  • 95% Confidence Interval for Alpha (%):[8.7,33] (between 8.7 and 33)
  • 95% Confidence Interval for Beta       :[-0.2,1.1]
  • 90% Confidence Interval for Alpha (%):[10,31]
  • 90% Confidence Interval for Beta       :[-.1,1.05]
(For the last four computations, annual ten year treasury rates were used as the risk free rates, and the annual returns of the SP500 index  were used as the market returns.)

As far as can be ascertained, by most measures this strategy outperforms all the publicly available strategies for investing in Fidelity Select Funds.

This strategy starts with FBIOX as the position in the first 13 weeks of the year 2012. We will update it every 13 weeks.

For comparison purposes, here are some statistics for the whole basket of Fidelity Select funds (each statistic is computed for the life of each fund during 1991-2011):
  • Minimum annual returns of the funds range from -63% to -18%,
  • Mean annual returns range from 0% to 20%.
  • Maximum annual returns range from -2% to 16%.
  • For a basket of equally weighted funds (numbering 40) rebalanced annually, the CAGR for 1991-2011 is 12%, and CAGRs for the last 1, 3, 5 and 10 years are, respectively, -5%, 18.5%, 2% and 6.5%.

This is not investment advice, but just an effort to track the results of hypothetical investments according to a particular strategy.

I am not associated with Fidelity funds in any capacity except as an account holder.