Simple Momentum Rotation

I was flipping though Mike Carr’s book again the other day, and decided to download the monthly data for the Fidelity Select Sector funds from Yahoo.  (Part of the reason was due to my frustration with the state of asset class testing software that I did a post on the other day).

I reran my simple rotation system on the universe of 23 funds that had data back to 1988.  Results were broadly similar as those in my book, albeit with higher drawdowns.  (These all are equity funds, so they lose the diversification benefit of including bonds, etc).  This test was meant to be instructive rather than exhaustive.

Simply taking the top fund, updated monthly, based on the average rolling 3/6/12 month performance resulted in compound returns of 18% per year, vs. 10% for the average fund.

Simply taking the top 3 funds , updated monthly, based on the average rolling 3/6/12 month performance resulted in compound returns of 16% per year, vs. 10% for the average fund.

Both systems had similar volatility  and drawdowns (54%, occurring in 08/09) as the underlying funds (average of 61%).

I think Fido has some screwy rules for holding their funds, but I see no reason why this wouldn’t work splendidly with a diverse portoflio of ETFs or mutual funds.  The sample 5, 10, 20 fund allocations from my book would be a good start.

fido rotate

View Comments to “Simple Momentum Rotation” (Leave a Comment)


  1. Damian says:

    Didn't mention it in the other thread, but I use Amibroker for testing systems like this because it has a rotational trader. Might be worth a look.

  2. WorldBeta says:

    I think I own Amibroker but never got into it. . .

  3. Damian says:

    It's good – can automatically download data from Yahoo, and then, from there, you can program a simple rotation pretty simply – email me if you want some sample code to get you started.

  4. WorldBeta says:

    no thank you, I want to be programming less, not more! sounds like a good
    intern project though .. .

  5. Damian says:

    LOL – it's all of about 10 lines of code – I think you could handle it. :)

  6. Damian says:

    Also Portfolio123 just added the same capability.

  7. WorldBeta says:

    only back to 00 though right?

  8. Damian says:

    Don't know – I don't have enough time to look at P123 to see the capabilities – if they had added it 2 years ago I would be using it. Maybe it's a job for my intern. ;)

  9. Andrey Shpak says:

    What would the results be if you add the 10-mo-MA filter to the entry (ie no tinvest if the selected fund is below 10-mo-MA)?

    I would imagine it would be very easy to test if you already have all the data downloaded in Excel.

  10. TraderMark says:

    Mebane, not a statistician here… when you say average rolling are you simply ranking the 23 funds from 1 to 23 based on 3 mo, 6 mo, and 12 mo and whomever has the lowest number (i.e. #1 in 12 mo, #3 in 3 mo, #4 in 6 mo = 8) are the 3 to go with? then rebalance monthly?

    the drawdown of 54% is a bit too much for my taste though lol

  11. jason harris says:

    To build on what Andrey wrote: maybe the drawdowns could be reduced by going to cash (or equivalent) when the market goes under the 10-month average at month's end?

  12. WorldBeta says:

    check back tomorrow.

  13. WorldBeta says:

    check back soon

  14. wher says:

    Mebane,
    This is similar to what Janet Brown has been doing successfully for years with her FundX strategy.
    “Janet M. Brown, President of DAL and Managing Editor of NoLoad Fund*X, joined DAL in 1978. Janet has been researching funds and developing fund investment strategies for many years. Prior to joining DAL, she worked in Brussels with a major financial services company where she specialized in mutual funds. Janet is frequently interviewed by the media on investment and mutual fund issues. “

  15. Damian says:

    Yes and they got killed with it during the downturn. The strategy does not do well in bear markets in general – too much quick-shifting momentum without longer term trends. Combine with a 200dma and it's more interesting.

  16. wher says:

    I haven't checked their track record lately, but makes sense. Thanks for correcting my observation.

  17. asudchiman says:

    idea… When using a mutual fund allocation with restrictions: Why not allocate a minimal % to all funds in an effort to avoid liquidation penalties (would it work?). Rebalance weighting to the Top X funds.

    Have you considered weighting the rotational strategy?

    ex: 5 Funds
    1: 35%
    2: 25%
    3: 20%
    4: 10%
    5: 10%

  18. asudchiman says:

    idea… When using a mutual fund allocation with restrictions: Why not allocate a minimal % to all funds in an effort to avoid liquidation penalties (would it work?). Rebalance weighting to the Top X funds.

    Have you considered weighting the rotational strategy?

    ex: 5 Funds
    1: 35%
    2: 25%
    3: 20%
    4: 10%
    5: 10%

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