Simple Fidelity Sector System outperforms the S&P 500

Back in April, I wrote a blog piece showing that the majority of Fidelity Sector Funds have historically beaten the S&P 500 index in any given year. Over the weekend, I tested a very simple system using the sector funds and was surprised by how much it outperformed. The system just trades one day a year. It buys every Fidelity sector fund (equally weighted) at the beginning of each year and holds for one year. At the end of the year it rebalances back to equal weighting for the next year. Here is how this simple system did since 2000 compared to a Fidelity S&P 500 index fund (ticker:FUSEX):

                               Sector System           FUSEX

  • 2000         +11.62%           -9.18%
  • 2001         -6.85%              -12.05%
  • 2002         -17.04%            -22.21%
  • 2003         +36.12%           +28.50%
  • 2004         +16.12%           +10.73%
  • 2005         +14.12%           +4.85%
  • 2006         +13.47%           +15.72%
  • 2007         +11.82%           +5.43%
  • 2008         -40.53%            -37.03%
  • 2009         +44.74%           +26.51%

So far in 2010, the equally weighted Fidelity sector funds are up nearly 15% and are again beating the S&P 500 index handily. The only two years where the sector funds lagged were 2006 and 2008.

The big drop of over 40% in 2008 is troubling however, so anyone who wants to use a system like this should use a trailing stop loss or moving average to protect against a major drop.

The total 10 year return for the sector fund system was +70% (or 5.5% annualized). The total 10 year return for the S&P index fund (FUSEX) was -10% (annualized return of -1%).

If anyone wants  a copy of the underlying sector fund information, send me an email.


One response to “Simple Fidelity Sector System outperforms the S&P 500

  1. Interesting article. I have to say, I’m a little puzzled as to how putting equal weight in Fidelity’s sector funds should beat the average. Shouldn’t you basically just match the index? If not, then this suggests that Fidelity managers are very good at selecting compaines which will outperform – in which case, why pick the sectors yourself?

    I think what would be interesting is picking the worst performing sector over, say, 5 years, and selecting that fund.

    I’m not sure I like your trailing stop loss idea. There’s no telling in advance how much you will or wont loose, so how would you know where to set the stop loss, and where to get back in? Your idea is fine in hindsight, but probably wont work in future.

    Although the strategy lost 40% in 2008, it only underperformed the index by 3%. Given the generally significant superior performance in other years, the strategy seems sound to me. I’m from the UK. In 2008, I returned -34%, compared with the Footsie of -29%. In 2009, OTOH, I made +44%, compared with the Footsie of +22%. I’ve noticed in the past that, coming out huge downturns, value-based strategies seem to perform much better than indexing.

    I tend to pick my own shares – which is of course much more risky. If you buy into sector funds, then it seems unlikely that you will get totally wiped out. So I think you’ve got to take the rough with the smooth, and not try to second-guess how the market will behave when it’s down 10%, 15%, 20%, 25%, or even more.

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