PORTFOLIO ROTATION STRATEGY

Investment Analysis and Portfolio Management

Submitted By:
ONKAR BHAGAT
0271/54
S.No. Index Page No

1 Implementation 2

2 Working 2

2.1 Factors determining the Portfolio Rotation Strategy 2

2.2 Asset Classes 2

2.2.1 Sectors in Equity asset class 3

2.3 Business Cycle 4

2.3.1 Stages of Business Cycle 4

2.3.2 Phases of Business Cycle 4

2.4 Asset Class performance with respect to business cycle 5

2.5 Sector performance rotation within asset class 6

3 Risk Management 7

4 Limitation 7

5 Links 7

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Portfolio rotation is the action of shifting investment assets from one sector of the economy
to another. It is an active management strategy with top down approach of investing with
movement of money from one asset class to another with significant rotation between the
sectors in each asset class.
It involves using the proceeds from the sale of securities related to a particular investment class
for the purchase of securities in another class. This strategy is used as a method for capturing
returns from market cycles and diversifying holdings over a specified holding period. Also this
strategy involves an analysis of the overall market—including monetary policy, interest rates,
commodity and input prices, and other economic factors.
This can help investors assess the current economic environment and determine the current
phase of the business cycle.

1. Implementation
1. Depending upon the investor’s requirements (investment horizon, risk capacity) and
stage in business cycle; portfolio mix is decided for investor with certain percentage for
each investment class.
As this is tactical asset allocation, the percentage for each asset class is not fixed and
can be changed according to different factors.
Eg: Risk averse investor with short investment horizon will invest ~100% in fixed
income, while risk tolerant with long investment horizon will go for equity.
2. Under each asset class there is sub-asset class allocation of the total share. This is
dependent on the macro-economic factors.
3. The portfolio mix is periodically revised depending upon the investor’s requirements
(investment horizon, risk capacity) and stage in business cycle. Period can be 1 month
or 1 year or n months depending upon the investment horizon, risk capacity, liquidity
of portfolio and business cycle period.

2. Working
2.1. Factors determining the Portfolio Rotation Strategy
1. Client Level
a. Investment Horizon
b. Risk Capacity of client
2. Economy Level
a. Business Cycle
3. Asset Class
a. Volatility
b. Liquidity
c. Risk factor
d. Risk adjusted rate of return
2.2 Asset Classes:
1. Cash: Liquidity and Power to buy anything
a. Liquid Funds
b. Saving Account

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 c. Online Wallets
d. Hard Cash
2. Equity
a. Start-up Funding
b. Index Funds
c. ETF’s
d. Equity Mutual Funds
e. Stocks
3. Fixed Income
a. Endowments Policies
b. Debt Mutual Funds
c. Debentures
d. EPF / PPF / NSC
e. Bonds
f. Post Office Products
g. Recurring Deposits
h. Fixed Deposits
4. Real Estate
a. REIT
b. Commercial Property
c. Bungalow
d. Plots
e. Flats
5. Commodities
a. Corn
b. Wheat
c. Crude Oil
d. Copper
e. Silver
f. Gold
2.2.1 Sectors in Equity asset class:
NIFTY 50 represents the weighted average of 50 Indian company stocks in 13 sectors:
1. Financial Services
2. Energy
3. IT
4. Consumer Goods
5. Automobile
6. Metals
7. Construction
8. Pharma
9. Cement & Cement Products
10. Telecom
11. Fertilisers and Pesticides
12. Services
13. Media & Entertainment
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2.3 Business Cycle
The economic cycle is the natural fluctuation of the economy. Factors such as gross domestic
product (GDP), interest rates, levels of employment and consumer spending can help to
determine the current stage of the economic cycle.
2.3.1 Stages of Business Cycle
1. Expansion:
During the expansion phase, the economy experiences relatively rapid growth, interest
rates tend to be low, production increases and inflationary pressures build. It is also
characterized by increasing employment.
2. Peak:
A peak is the highest point of the business cycle, when the economy is producing at
maximum allowable output, employment is at or above full employment, and
inflationary pressures on prices are evident.
3. Contraction:
The collection phase is categorised as contraction, where growth slows, employment
declines (unemployment increases), and pricing pressures subside.
4. Trough:
This is the lowest point of business cycle, here the economy hits the bottom and from
here the expansion phase starts.
2.3.2 Phases of Business Cycle
1. Early-cycle phase:
Generally a sharp recovery from recession, marked by an inflection from negative to
positive growth in economic activity (e.g., gross domestic product, industrial
production), then an accelerating growth rate. Credit conditions stop tightening amid
easy monetary policy, creating a healthy environment for rapid margin expansion and
profit growth. Business inventories are low, while sales growth improves significantly.
2. Mid-cycle phase:
Typically the longest phase of the business cycle. The mid-cycle is characterized by a
positive but more moderate rate of growth than that experienced during the early-cycle
phase. Economic activity gathers momentum, credit growth becomes strong, and
profitability is healthy against an accommodative—though increasingly neutral—
monetary policy backdrop. Inventories and sales grow, reaching equilibrium relative to
each other.
3. Late-cycle phase:
Emblematic of an “overheated” economy poised to slip into recession and hindered by
above-trend rates of inflation. Economic growth rates slow to “stall speed” against a
backdrop of restrictive monetary policy, tightening credit availability, and deteriorating
corporate profit margins. Inventories tend to build unexpectedly as sales growth
declines.
4. Recession Phase:
Features a contraction in economic activity. Corporate profits decline and credit is
scarce for all economic factors. Monetary policy becomes more accommodative and
inventories gradually fall despite low sales levels, setting up for the next recovery.

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2.4 Asset Class performance with respect to business cycle
The performance of economically sensitive assets such as stocks tends to be the strongest when
growth is rising at an accelerating rate during the early cycle, then moderates through the other
phases until returns generally decline during recessions. By contrast, defensive assets such as
investment-grade bonds and cash-like short-term debt have experienced the opposite pattern,
with their highest returns during a recession and the weakest relative performance during the
early cycle.
Investors can implement the business cycle approach to asset allocation by overweighting asset
classes that tend to outperform during a given business cycle phase, while underweighting
those asset classes that tend to underperform.

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2.5 Sector performance rotation within asset class
Within equity markets, more economically sensitive sectors such as technology and industrials
tend to do better in the early- and mid-cycle phases, while more defensively oriented sectors
such as consumer staples and health care have historically exhibited better performance during
the more sluggish economic growth in the late-cycle and recession phases.

Bond market sectors have also exhibited economic sensitivity. More credit-sensitive fixed-
income sectors (such as high-yield corporate bonds) have tended to do better in the early phase
of the cycle, while less economically sensitive areas (such as government and other investment-
grade bonds) have done relatively well in slowdowns and recessions.

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3. Risk Management
1. Diversification Rule:
Investment diversification reduces the overall risk of a portfolio. There can be
additional rule of investing, like ceiling for each asset class or sector.
2. Maximum Portfolio Drawdown
How much of investment portfolio one is willing to lose; or maximum portfolio
drawdown, is a measurement of a portfolio decline from a peak to its lowest point. This
is critical risk management concept that very few investors consideration to.

4. Limitations
1. Sector rotation strategies can be expensive to implement because of the potential costs
associated with extensive market trading which can negatively effect returns. Moving
capital in and out of sectors can be costly due to trading fees and commissions. For that
reason, sector rotation is typically a strategy considered for institutional managers or
high net worth investors.
2. Sector rotation also requires very active analysis of investments and economic data. It
is typically a consideration for professional portfolio managers because of the time
constraints and data access involved.
3. Individual stock has exposer in more than one asset class.

5. Links:
1. https://www.nseindia.com/products/content/equities/indices/nifty_50.htm
2. http://www.arborinvestmentplanner.com/investment-portfolio-management-basics-
risk-asset-allocation-investing-strategies/
3. https://www.investopedia.com/terms/s/sectorrotation.asp
4. https://www.investopedia.com/terms/t/topdowninvesting.asp
5. https://www.fidelity.com/learning-center/trading-investing/markets-sectors/intro-
sector-rotation-strats
6. https://courses.lumenlearning.com/atd-baycollege-introbusiness/chapter/reading-the-
business-cycle-definition-and-phases/
7. https://www.investopedia.com/terms/e/economic-cycle.asp
8. https://www.fidelity.com/learning-center/trading-investing/markets-sectors/intro-
sector-rotation-strats
9. https://www.fidelity.com/viewpoints/investing-ideas/business-cycle-investing
10. https://www.fidelity.com/viewpoints/investing-ideas/sector-investing-business-cycle
11. https://corporatefinanceinstitute.com/resources/knowledge/economics/business-cycle/

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