We highlight some of the most popular FSM models following the latest seasonal quarter evaluations.
November FSM Evaluation
This week marks the latest evaluation for our seasonal Fund Score Method (FSM) models. These strategies were evaluated in line with our normal seasonal evaluation period, with any corresponding trades sent out Monday morning (11/3). There were several notable developments in this evaluation, with significant turnover across some of our more widely followed FSM strategies. 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 from 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 of 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 the models 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.
November 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. The November evaluation brought another significant reshuffling of the portfolio, with four of the model’s five positions rotating out. TROSX, POMIX, TRIGX, and PSILX were removed after their fund score rankings fell outside the model threshold. In their place, the model added PRHSX, PRJPX, PRDGX, and TRULX.
This 80% turnover comes just one evaluation after the model experienced a complete reshuffling in August, when all five positions rotated out. While that level of turnover is uncommon, the recent changes are a good example of the systematic nature of the FSM process. Rather than remaining tied to the previous quarter’s leadership, the model reevaluates the entire inventory and pushes exposure toward the funds displaying the strongest fund scores at the time of evaluation. It is this exact feature that helps momentum quickly cut ties with emerging laggards. Of the four rotations this quarter, three of those funds were just purchased during the last evaluation. While the goal of our strategies certainly isn’t to churn between losers, cutting small losers before they become big losers is mission critical when staying on top of your portfolio. With the trades, the model decreased exposure to international options and now holds a preference towards dividend growth, healthcare, focused Japan, large cap core, and value. Going forward, the model will remain nimble enough to rotate back towards more growth/global options if such strength dictates. YTD, the model is tracking in line with its benchmark.
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. The November evaluation brought significantly more turnover than the prior evaluation, with four of the model’s five positions changing. AEPGX, CWGIX, AIVSX, and IGAAX rotated out of the portfolio after falling outside the model’s fund score threshold. The model replaced those positions with AMRMX, AWSHX, CAIBX, and AMECX. Major themes were similar for this model and its trades, seeing a rotation away from international/growth focused assets and towards more value/growth & income options. YTD, the model is tracking in line with its benchmark.
The degree of turnover across both strategies is perhaps the biggest takeaway from the November evaluation. Each model replaced a majority of its holdings, highlighting some heavy rotation that occurred throughout Q3. As mentioned previously, the tactical nature of each model (including other models, FSM or matrix based, not mentioned in this report) means that a further resurgence in strength for international/heavy growth focused names will see them move back into the models as time progresses.
