Mutual Funds Rotational Strategy

Mutual Funds Rotational Strategy


RJ Camposagrado

Sell in May and go away. Most investors have heard this old fashioned wise saying. In case you haven t, it means selling your stocks in May and sitting on cash until the end of the October. But does this strategy really work? According to data from Standard and Poors, since 1945, the S&P 500 delivered an average return of 6.7% during the period from November to April. In similarity, the S&P 500 returned only 1.4% during the May to October period. Furthermore, the November to April stock market period consistently outperformed the May to October period more than 71% of the time.

So assuming this wise saying bears out to be a bit genuine, what is an investor to do? A 1.4% gain during the May to November period is still better than any return one would get from a money market fund or cash.

Instead of parking your stock portfolio in cash, there is one strategy that has historically proven profitable and allows an investor to stay in stocks. It is a sector mutual funds rotation strategy, using mutual funds focused exclusively on healthcare.


Over the last 20 years according to Standard and Poors Data, from the May to October period, the best performing mutual funds in the stock market has been the health care mutual funds sector. By investing in the healthcare mutual funds only, you would have outperformed the S&P 500 by more than four times during this period.

What is the reason for this? The majority of mutual funds are paid to always be fully invested in the stock market. So instead of holding cash, they put their money in defensive sectors such as healthcare stocks, which are less risky and have historically exhibited little or no correlation to the stock market or the economy.

Furthermore, the numbers bear out. A strategy based on rotating 100% of your portfolio in the healthcare mutual funds during the May to November period and then switching back into the S&P 500 index from November to April returned 10.8% annually over the last 20 years. This is compared to a 6.7% average annual return investing in the S&P 500 alone. Moreover this mutual funds rotational strategy has outperformed the market 63% of the time.

From 1990 through 2006 the S&P 500 Healthcare Sector and its mutual funds has returned on average 5.6% during the May to Oct period vs. 1.4% for the S&P 500 Index over the same period, outperforming the S&P 500 Index 63% of the time.

The best way to take full advantage of the returns from this strategy is to invest in top ranked healthcare mutual funds. You can do this quantitatively or fundamentally using predictive mutual fund factors such as past performance, expense ratio or manager tenure all of these focus on the fund manager s stock picking ability.

Therefore one should look for the healthcare mutual funds with the above criteria and apply it to the mutual funds rotational strategy above.

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