Layered Sector Rotation with Economic Regimes and Within-Sector Factors

Summary

The document proposes separating sector allocation from industry selection because broad sector shifts are linked more closely to economic conditions, while industry performance depends on factors such as earnings, valuation, and capital flows. It argues that conventional industry factor models can drift toward particular sectors, creating less stable comparisons across industries.

For the top layer, the approach maps rising or falling cash flows and discount rates to four market regimes, then uses an allocation framework to identify suitable sectors. Within selected sectors, it combines screened industry factors into a composite ranking signal. The document reports a Rank IC of 0.1027, an ICIR of 1.5241, and a 67.62% IC win rate. Its historical strategy figures include 9.77% annualized return, 6.87% annualized excess return over Wind All A, and 5.04% relative drawdown. These are reported results, not independent validation; the document warns that factor effectiveness may not persist and policy shocks are difficult to control.

Key ideas

• Sector allocation and industry selection are treated as separate decisions with different drivers.
• The sector layer uses cash flow and discount rate directions to classify four economic regimes.
• The industry layer ranks firms within sectors using a composite of screened factors.
• The document reports historical factor and strategy statistics, but does not establish that they will persist.
• It identifies factor extrapolation and policy shocks as key risks.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.