Over the weekend, the New York Times ran an article about a new study of investment strategies. The article supported Northlake’s ETF rotation strategy by endorsing a strategy of monthly rotation among actively managed mutual funds based on four separate macroeconomic factors. This article caught my eye because after more than two years of developing and using Northlake’s Market Capitalization and Style models I still have seen very few money managers promoting a similar strategy.
What I find most notable about this article is that the authors of the study are using a multi-factor model to rotate among mutual funds using different strategies for active management. This is very similar to the strategy Northlake employs for the ETF portion for client portfolios. Northlake has adapted two models developed by Ned Davis Research which signal when current conditions in the economy and the stock market support that a certain size company or a certain style of company (growth or value) are more likely to outperform. The results of the research in the article and Northlake’s own backtests reveal that this strategy can outperform the market by significant margins over a multi-year period….

The article used a backtest period from 1980 to 2002, compared to the 1980 to 2004 period in which Northlake’s Market Capitalization and Style models were tested. Further, the backtest in the article closely paralleled the results of Northlake’s models, indicating the potential to beat the market by mid-to-upper single digit annualized returns prior to transaction costs.
Here is a link to the article which I copied into a Word document. I have highlighted a few key passages which show consistency with Northlake’s ETF rotation strategy.
Why Northlake’s Strategy May Be Better
Northlake’s models are focused on Market Capitalization and Style and use multi-factor models that contain a dozen or more indicators vs. just four factors for the strategy in the article. Northlake’s indicators are a combination of economic, interest rate, and stock market indicators rather than just interest rate indicators used in the strategy outlined in the article. Northlake includes stock market indicators that measure investor sentiment and current trends to add an element of timing to the models. The idea is not have perfect timing but to make sure that the models signals are fresh and are not way too early or way too late.
Finally, Northlake makes use of exchange-traded funds (ETFs) to execute its strategy. This keeps the all-in cost of management fees and commission costs comfortably below the fees charged by many actively managed mutual funds which run from 1.5% to 2%.