We've made several changes in our model portfolio to increase our margin of safety amid the market v...
2 Funds for Country and Sector Rotation
02/01/2012 6:00 am EST
Quantitative asset management firm Innealta Capital, which has specialized in ETFs, launched two mutual funds in December. The firm’s Scott Silverman tells Moneyshow.com about the Innealta Country Rotation Fund (ICCIX) and the Innealta Sector Rotation Fund (ICSIX).
Kate Stalter: I’m on the phone today with Scott Silverman of Innealta Capital.a
Scott, I noticed that just a few weeks ago, your company launched a couple of new mutual funds. Can you tell our listeners something about those, and what kind of investors they might be best suited for?
Scott Silverman: Absolutely. At Innealta we created two mutual funds that launched on December 30. So as of really the New Year, 2012, investors have had a chance to access our strategies.
These are portfolios that have been around for some time in a separately managed format or vehicle. Obviously, a mutual fund allows us to be available to far more folks. It’s a vehicle that many are familiar with, so these aren’t new processes by any means to Innealta. It’s been in our cooking for some time...but it is of course, a new vehicle.
We have two that we’ve launched: The Innealta Country Rotation Fund and the Innealta Sector Rotation Fund. Both are leveraging the same investment process that is run by a four-person investment team, at the helm of which is our founder and chief investment officer, Dr. Jeff Buetow.
- Also read: Sector Rotation in Current Markets
By the way, this investment process is also his life’s work. He’s worked on it over the past 20 years. He’s obviously evolved the process over the last 20 years, but it is his life’s work that governs our investment process.
They’re rather unique, these portfolios. The Sector Rotation Portfolio being a domestic portfolio, and the Country Rotation Portfolio being an international portfolio, have the ability to make decisions between investing in equities, whether it’s sectors or countries, or to actually take those proceeds and move into fixed income during times of duress. They’re a little more open-ended in terms of their ability to be flexible.
I think investors have been coached, they’ve learned, they’ve had experience in dealing in the long-only world, which is where money managers buy and are fully invested in equities. These are a little different. We have the ability to move in and out of equities between sectors, countries, and then of course, a basket of fixed income during times of duress.
Kate Stalter: Let’s drill down a little bit, Scott, and talk specifically about the sector fund for just a moment, and how you make your selections there.
Scott Silverman: Sure, the framework that governs our investment process, and again this is built by Dr. Jeff Buetow, managed by a four-person team. As a little footnote, three of the four individuals on the team are PhDs. All four are holders of the chartered financial analyst designation, so it’s a very well pedigreed, very robust investment team with a lot of experience.
Essentially, we are studying economic, fundamental, risk, and even technical data on a daily basis and making a decision on the relative attractiveness of an individual sector to a basket of fixed income.
Now we’ll analyze the ten S&P GIC Sectors as they’re known—energy, IT, health care, materials, consumers, just to name a few—and essentially what we’ll do is look at the relative attractiveness of energy, independent of the other nine sectors, but relative to a basket of fixed income.
- Also read: The 3 Best Sectors for Early 2012
If energy were to be deemed relatively attractive on a risk-adjusted basis, it would get a 10% weight. Not 3%, not 7%, not 5%, it’s not an arbitrary decision, it’s actually a binary decision. It’s an on/off switch. Ten sectors, each one has an opportunity to be invested at 10%.
If energy is deemed to be unattractive, it’s awarded a zero, and the 10% proceeds then earmarked for energy move to fixed income. We do this for all ten sectors every single day. Independent of one another, but relative to fixed income. It’s a very different construct than what maybe investors have become accustomed to over the years.
Kate Stalter: That is an interesting model. Does the Country Rotation Fund work in a similar fashion?
Scott Silverman: Yes it does. Same investment process, same investment team, but instead of analyzing ten sectors, we look at 28 international economies between developed and emerging. You will find names like Brazil, India, Russia, China, just to name a few as a part of the opportunity set.
A little bit different than the sector rotator: We only have 20 slots, so we can’t have 28 countries turned on as we call it. It is this binary process, so if we had 28 countries turned on, we would pick our favorite 20.
However, same process: We look at our economic, fundamental, technical, and risk data on a daily basis, and we’re analyzing the relative attractiveness of, say, Australia. Independent of the other 27 countries, or relative to that same basket of fixed income.
If Australia is deemed to be attractive, is awarded a 5% weight. Not 3%, not 2%, not 7%; again, it’s not an arbitrary decision, it’s a binary one. It’s an on/off switch, and of course we have slots for 20 countries.
Doing the math, you can see that’s 5% per country. If Australia is actually deemed to be unattractive, you’d find that it has a 0% weight, and those 5% proceeds filter to fixed income.
Now, as another footnote if I may, these portfolios had the opportunity of moving away from equities throughout 2008. Actually, they did the exact same thing through the third quarter of 2011, and we have been sparsely invested in equities in both of them throughout the last several months.
- Also read: 3 Global Fund Bargains
Kate Stalter: For individual investors who find this intriguing, and would like to get involved, is this something they can buy through their brokers? How would they go about that?
Scott Silverman: Absolutely. They are able to talk to their financial advisors about our strategies.
The Country and Sector Strategies are available at pretty much all of the custodians, whether that be the Schwabs, the Fidelities, the Pershings, and a variety of broker/dealers that make it available for the financial advisory community. If they talk to their advisor, they’ll be able to access these strategies.
Related Articles on FUNDS
American Century Ultra (TWCUX) is a new buy in our conservative portfolio; the fund was launched in ...
For most of 2018, a frothy market and rising interest rates dimmed the appeal of funds tilted toward...
We own funds to cover parts of the investment universe where we cannot use individual shares, be it ...