We highlight some of the most popular FSM models following the latest seasonal quarter evaluations.
This week marks the latest evaluation for our seasonal Fund Score Method (FSM) models. These strategies were evaluated based on the market data through Monday (8/3), with any corresponding trades sent out Tuesday morning (8/4). There were several notable developments in this evaluation as we saw some continuity in the new positions rising to the top of the various model inventories. Today, we will review the FSM model framework and then focus on some highlights from the latest evaluation. Those that do not need a refresher on the structure behind the FSM models can skip down to the latest updates.
The FSM Approach
Our FSM models have the same goal as any model on our platform; focusing the model exposure on the strongest areas of the market while underweighting or avoiding the weak areas. The approach to achieve this goal differs slightly than matrix models, as FSM models use fund scores to rank the inventory members. Every ETF and mutual fund on the NDW platform has a fund score ranging from 0 (weakest) to 6 (strongest). More information on fund scores can be found here. The FSM framework simply takes the inventory members and sorts them by fund score at set evaluation points, typically either monthly or quarterly. We use off calendar evaluations defined on “seasonal” quarters, which take place at the beginning of February, May, August, and November. Most FSM models also have defensive triggers that can push some or all the portfolio to cash, but those remain risk-on following the recent evaluation. More on those triggers and the FSM framework can be found here.
Using fund scores for inventory rankings in the FSM models will not differ drastically from what can be shown using a matrix ranking. Both methodologies look to rank the areas with the highest momentum at the top. However, we have seen that the fund score ranking can be easier to grasp than the matrix, making them more applicable for certain use cases. FSM models are very popular for retirement accounts or non-taxable accounts, partially due to their propensity for more turnover than a matrix-based approach.
August Evaluation Highlights
The FSM T Rowe Price 5S P4050 Model is one of the most popular models on our platform. This model takes an inventory of 45 mutual funds from T Rowe Price and focuses exposure on the top five funds by fund score at each evaluation. This week’s change saw all five holdings rotate out of the portfolio in favor of five new areas of strength, which is very rare. This was only the fifth time we have seen 100% turnover at one of the model evaluations. While trades like this are rare, the portfolio is doing what it is designed to do, namely move away from laggards and push the allocation toward current leadership. Following these changes, the T Rowe Price 5S Model now shows an overweight posture to value, with new positions in the T Rowe Price International Value Equity Fund (TRIGX) and the T Rowe Price Value Fund (TRVLX). Although the Model has experienced more difficulty over the past month, the longer-term annualized returns are still favorable when compared to our benchmark 80/20 portfolio.
The American Funds 5S PR4050 Model is another popular strategy under the FSM banner. Like the T Rowe strategy, this model seeks to focus exposure on the five strongest funds from an inventory of 21 American Funds mutual funds. This model saw just one change at the most recent evaluation, gaining exposure to the EuroPacific Growth Fund (AEPGX). While international equities have seen varying performance over the past month, the EuroPacific Growth Fund has held up well. The fund possesses a robust 5.36 fund score and sits on three consecutive buy signals on its default chart. We saw the volatility over the past month lead to some normalization in the trading band, as AEPGX sits at the mid-point of the band. Even for those not following the model, the fund remains actionable around current levels with initial support at $60.80.
