The Fund-Track for Fidelity Select funds is a sector timing and
sector investing tool for Fidelity sector funds. It enables
investors to compare mutual funds and implement a sector investing
strategy utilizing a mutual fund timing approach.
This site and/or the author is not
associated in any way with nor receiving compensation from Fidelity
Investments or their parent organization "FMR".
What Are They
Fidelity offers a group of 41 industry-focused
sector funds they call the Fidelity Select Funds. Fidelity launched these
in 1981 as the industry's first family of sector funds. They are managed
by Fidelity industry analysts and provide an investment research foundation
shared by all the Fidelity funds. They are actively managed and focus in
industrial sectors that span seven distinct categories. Each category of
Fidelity sector funds includes one broad fund. (denoted by *) Because of their
focus, these funds offer the potential for above average returns, but at the
expense of higher short-term volatility. They are displayed below and can
be viewed in detail by linking to Fidelity's Select Fund Site. Additional
information can be obtained by selecting the ticker symbol of the fund on each
Rank which links to Morningstar's detailed analysis of each Fund
Category - Consumer Industries
1 Consumer Industries*
FSCPX
2 Food & Agricultural
FDFAX
3 Leisure
FDLSX
4 Multimedia
FBMPX
5 Retailing
FSRPX
6 Construction & Housing
FSHOX
Category - Cyclical Industries
7 Air Transportation FSAIX
8 Automotive FSAVX
9 Chemicals
FSCHX
10 Cyclical Industries* FCYIX
11 Defense & Aerospace FSDAX
12 Environmental FSLEX
13 Industrial Equipment FSCGX
14 Industrial Materials FSDPX
15 Transportation FSRFX
Category - Financial Services
16 Banking FSRBX
17 Brokerage/Inv Mgnt FSLBX
18 Financial Services*
FIDSX
19 Home Finance FSVLX
20 Insurance FSPCX
Category - Health Care
21 Biotechnology FBIOX
22 Health Care* FSPHX
23 Medical Delivery FSHCX
24 Medical Equipment/Systems FSMEX
25 Pharmaceuticals FPHAX
Category - Natural Resources
26 Energy FSENX
27 Energy Service FSESX
28 Gold FSAGX
29 Natural Gas FSNGX
30 Natural Resources* FNARX
31 Paper & Forest Products FSPFX
Category - Technology
32 Business Svcs / Outsourcings FBSOX
33 Computers FDCPX
34 Developing Communications FSDCX
35 Electronics FSELX
36 Networking & Infrastructure FNINX
37 Software/Computer Systems FSCSX
38 Technology* FSPTX
Category - Utilities
39 Telecommunications FSTCX
40 Utilities Growth FSUTX
41 Wireless FWRLX
Category - Cash
42 Fidelity Select Money Market FLSXX
Select Fund Volatility
(Risk) - The following PDF Report shows all Select Funds
sorted by their Standard Deviation which assesses a funds volatility. This
volatility is seen on each week's rank.
Select
Funds By Standard Deviation -- PDF
Benefits & Risks of Sector Investing
Benefits:
 | Ease of Investing Relative to
Stocks - Fidelity sector funds offer the potential for
higher-than-average returns, and a simplified and less
time-consuming way to participate in a particular industry without
choosing individual stocks. These funds can provide an alternative
to individual stock investing for those who believe that certain
industries can outperform others during different economic times.
In this they can be used to add diversification to an investment
portfolio. |
| Aggressive Growth - Sector funds
can add the potential for strong returns to a well-diversified
portfolio in the aggressive growth allocation area. |
| Potential for Above Average
Returns - Sector investing particularly in funds that are highly
focused provide investors with returns that can be much higher
then normal funds, and in a broad range of differing economic
conditions. The key is tracking them on a timely basis. Fund-Track
does this employing a sector timing approach to investing in these
funds. |
Risks:
| Volatility - Stocks in any
particular industry tend to move the same way in response to
certain economic stimuli. It follows that sector funds holding
similar stocks typically exhibit higher volatility then a more
broadly diversified fund. These funds tend to move up and down the
ranks smoothly but at times can and will move quite quickly due to
certain economic and/or geopolitical conditions. It is important
to review the ranks in a regularly successfully utilize this
mutual fund timing and upgrading approach. |
| Industry Risk – Fidelity mandates
that their Select funds must keep most of their assets in stocks
within their specified industry, even if the forecasts for those
industries are not optimistic. Because of this you will typically
see funds within the same industrial category (i.e. Health Care,
Biotechnology, Medical Delivery ) rise or fall through the
Fund-Track ranks in unison. |
| Individual Stock Risk - Because
Fidelity sector funds are focused in particular industries and
generally hold far fewer stocks then most broad based funds their
performance may be more affected by the performance of an
individual stock within the fund. |
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Fidelity Select Fund-Track Example and Explanation
The following acrobat PDF file shows a Fidelity
Select Fund-Track Ranks
Example Fidelity Select Fund-Track Rank
- PDF
For
column definitions see the How It
Works Section of the About Page.
How It Works
The Fidelity Select Fund-Track is based upon the
same premise as that of the regular Fund-Track: that regardless of the market's
direction there always exists at least some industrial sector that can do well
because dissimilar industries react differently to various economic conditions.
By tracking all these sectors closely one can employ a successful sector timing
strategy by identifying those if any that are able to take advantage of the
prevalent conditions. The Fidelity Select funds doing this are those
exhibiting the strongest price strength (strongest trend) and rising to the top
of the ranks. The general idea is to just keep upgrading to the highest
ranked funds
The Fidelity Select Fund-Track uses the same principals as Fund-Track but
calculates price strength differently. It uses a more aggressive algorithm
adapted for the Select funds higher volatility. This difference in volatility is
a primary reason why these funds are ranked separately from the funds in the
general Fund-Track. Another important reason is that Fidelity has set up
these funds in a way that makes sense to limit trading just to them and/or other
Fidelity Funds exclusively. More on that below in the How To Use section
below.
A fund's "rank" within Fund-Track indicates how it
is performing relative to the other funds. When a funds Average Price
Strength drops below 0% its price is slipping below its calculated
average. i.e. it is dropping below and out of its current trend. It does
not necessarily mean that its price is dropping absolutely. Average Price
strength serves as an additional selling trigger because in a broad market
decline sometimes all funds regardless of their economic sector will be dragged
down. In these conditions even if a fund is high in the rank (relative to
others) it could be still be falling in price.
Therefore, these 2 conditions (Rank and Average
Price Strength above 0%) work together to indicate if funds are moving the right price direction and
how they are performing relative to others.
Profunds Bear Fund - This lone Non-Fidelity fund is
an index fund that tracks opposite the S&P 500, and therefore serves as a good
inverse approximation of what the market in general is doing. It is also
of similar volatility to the average Select Sector fund. When this fund is
at the top of the ranks with no other fund showing good positive strength, it
signals bear market conditions. One should stay in cash at
these times until this fun drops back in the ranks. This was previously
used just as a market barometer and not to be traded, but recently Fidelity has
dropped its 3% front end load (used to keep investors just in Select funds) and
thus one can actually trade into this fund if desired.
Select Money Market Fund - This fund always has
consistent price strength of 0%. Its price strength is actually slightly
above 0% because this funds averages a return of 3 – 5% a year depending upon
the prevailing interest rate. But, because it’s prices are not available
for download, in the interest of being conservative its price is pegged at $1 a
share consistently. With this constant price strength, this fund moves somewhat
slower up and down the ranks then the Profunds Bear fund. It can validate
what the "Bear" fund is showing. If no other fund is showing positive
price strength this fund will naturally rise to the top thus signaling bear
market conditions and to sell out to cash or to stay there until conditions
improve.
Trading into this fund is more conservative play then into the Profunds Bear
fund.
What To Expect
What to expect when utilizing Fund-Track is already
discussed on the About Page. The same
principals apply to utilizing this Select Fund-Track. To re-emphasize what
is stated there. Fund-Track is a system that utilizes past and current
data to identify trends. This means it is a lagging indicator, not a
predictive one. It is not designed to find and buy on bottoms and sell on
tops. It is meant to catch funds on their way up and then protect profits
by exiting on their way down.
In testing some tendencies of this system were
observed. One of the Fund-Track Discussion group members (Brown)
contributed the following observations for all trades made for the single fund
rotation model
portfolio over the years (1997 - 2001).
| Slightly less than half (29/67)
the returns were losses none of which there were greater then 10%- |
| Most returns fell between -10%
and 10% (56/67) |
| there were 11 returns between 10%
and 55% |
| "So it still holds that this
system seems to protect against large losses. |
Conclusions "Most of the time you are 'fiddling
around' with little gains and losses waiting for the infrequent, but very
profitable, big run-up". This is a fitting description to how this
system works. It will take a substantial a mount of small gains and losses
while waiting for strong trends in different industrial sectors to develop.
When they do emerge and Fund-Track signals a trade into them, some substantial
gains can be made. But, this takes patience as there can be long periods
in between of middling to small gains and/or losses. Large losses are
protected against as described above. The key is to stay patient,
mechanical and objective in your trades. This sounds easy and in principal it
is, but a lot of investors have a hard time sitting still when they should.
Use the approach recommended here or develop your own, but the key is to "stick
to it", and be consistent.
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Trading with
Fidelity
Because of trading conditions levied by Fidelity it
is recommended that investors utilizing this system open a Fidelity account. This is not an endorsement for Fidelity of any kind, but it is advantageous for
the following reasons:
| Early Redemption Penalty -
Fidelity assess a 0.75% penalty whenever a fund if fund is not
held a minimum of 30 days |
| No Transactions Costs - By
trading with Fidelity you can trade its funds with no transaction
costs if you trade through any of Fidelities automated exchange
services (online, or automated telephone trading) or $7.50 through
a Fidelity broker. |
| Hourly Trading - By trading with
Fidelity, intraday hourly trading is available with these funds. Thus when upgrading a Select fund you can sell a fund and buy
another on the hour and do not have to wait and accept the day’s
closing prices and then sit out a day in order to buy the fund you
are upgrading to. This is advantageous in a sector timing
approach. |
Fidelity Select funds have minimum investment
requirements of $2,500 per fund, ($500 for retirement accounts) and a $250
minimum for additional deposits. Fidelity also has a mutual fund supermarket
they call the Funds Network. On it they list over 4.500 funds of which 1,100 are "No
transaction fee" funds. These funds can be traded without any transaction fee if
they are held 180 days. The transaction fee for these if they are traded
inside that time period is a flat $75 fee, which is the same as that for trading
transaction fee (regular) funds. If you desire to trade Fidelity Select
funds with a non-Fidelity account, you should inquire as to the above points
with your current broker.
Fidelity limits switching in and out of the "same"
fund to no more then 4 times a year. They state that they will bar one from
trading this particular fund for the remainder for the year. I have heard that
they don't enforce this, but nevertheless one should be aware of their warnings and watch for
this. Looking at 7 years of history for the Fidelity Select Fund-Track,
single fund model portfolio the
maximum number of switches in and out of the same fund has been 3 (Gold in
2002), so I doubt this limitation would ever become an issue.
Recommended Trading Methods
Due to the poor performance of the Fidelity
Select Single Fund Model portfolio fund in 2003 a new trading approach was
developed, and analyzed. It was then back tested for 2 years for 2003 and
2004 to verify. This new approach on dividing investments in 5 equal
amounts and averaging them in on a weekly basis seems better adapted to the
current market behavior of these funds and has produced vastly superior results
for 2003, and slightly improved results for 2002, and with less work (weekly
review and upgrading rather then daily). This new method also holds
funds for a minimum of 30 days (unless a loss of over 5% is taken) and therefore
eliminates a lot of redemption penalty fees that were particularly evident in
2003.
Single Fund Rotation Method
Trading Mechanics
- Trading a fund within the ranks is triggered on 2
conditions whichever shows first
|
1. Relative rank – Sell a fund if it falls below
15th pace in the rank “or” |
|
2. Absolute price movement - Sell when a funds
Average Price Strength falls below 0% (negative).
|
Upgrading when average price strength turns
negative (below 0%) adds downside protection, and helps preserve
profits. In five years of trading utilizing these rules the
worst loss the Model portfolio incurred for one trade was 11%. These rules are
based around the important Investing adage of "letting profits run while cutting
losses". If all funds are tanking one of these two conditions will trigger a
"Sell" to either the Profunds Bear Fund or the Select money market fund.
The funds with the highest price strength are those exhibiting the strongest
trend and will rise to the top of the ranks. Simply stay invested in the top
ranked fund/s. The recommended trading rules for using the Fidelity Select
Fund-Track are as follows: (seen on the far right column of every rank)
Sell - Sell when one of these 2 conditions exists:
| When it drops below 15th place in
the rank (Last column = “Sell”) OR |
| When average price strength falls below 0%
|
Buy - Avoid buying into negative, short term or average price strength
(will not show a "buy"). In other
words, buy the highest ranked fund showing positive price strength. If the Profunds Bear fund (the one non Fidelity fund in the rank) is at the top in a
"Buy" position, then trade to it or more conservatively trade into cash the (Select money market account)
until another buy emerges in one of the Select funds.
Note: There is only one “Buy” recommendation
for each rank based on a single fund rotation principal (i.e. holding just one
fund at time) For those wanting to utilize more then one fund at time buy the
next highest fund showing “Hold” making sure that price strength is positive (>
0%).
Why The Recommended Rules?
Extensive testing was performed utilizing different rank trading thresholds,
hold times and average and short-term price strength levels over a 5-year
period. The best, and simplest approach to Select mutual fund timing was found
to be the one recommended. You are of course free to use any trading rules you
desire. By setting a higher rank threshold for trading (i.e. Selling when Fund
drops below 10th place) a more aggressive trading approach can be pursued which
will probably result in shorter hold times and increased redemption costs. In
contrast, setting a lower rank threshold results in a more conservative approach
with a longer hold time for each trade and less redemption costs. Similar
modifications can be made for the Average Price Strength trigger as well. I
found the recommended rules above to achieve the best performance, but this is
open to debate as there is an endless amount of trading permutations to try. More testing is encouraged for anyone desiring to attempt it. Just contact me
about what ideas you may have and we can discuss what I have already tried and
why. If the rules you utilize are consistent and outperform the Model
portfolio’s performance, please share it with us so that we may back test and
post for others to consider.
As seen on the PDF file documenting the performance of the model portfolio over
the 7 years (1997 – 2003) 1997-2003 Model portfolio PDF the following statistics
were recorded:
| Average annual number of trades:
11 |
| Average hold time for each trade:
36.5 Days |
| Average annual loss to redemption
fees: 5.4% |
| Avg. % Trades assessed with
redemption fee: 61% |
At first glance, one will notice that a high
percentage of trades were held less then 30 days and thus assessed with
redemption fees. (redemption fee = 0.75% of principal) These fees cut an average
of 4.4% off each year’s return. Attempting more conservative approaches that
reduced redemption fees yielded returns that were far inferior to the one
recommended. Portfolios were tested that included holding each fund at least 30
days and then trading to the top fund. These tests
resulted in no redemption fees but produced returns that averaged just above 0%
for the last 3 years, better then the market indexes but far less then those
portfolio tests in which 30 day limits disregarded.
Hybrids (combinations of
these rules) were also tested. They concluded that holding these funds for 30
days can be too long for at times they can lose all or most of their gains and
fall from the top to the bottom of the ranks in that time period. The conclusion
reached was that a .75% redemption fee was a small tradeoff to finding better
performing funds reaping larger gains and to avoid much larger losses in funds
that were diving in the ranks. Be sure to read the New weekly averaging
method for a new (2004) perspective on this.
Trading Tips
The same tips that apply to Fund-Track apply here. Please review the Fund-Track
Trading Tips and the How Not to Use Fund-Track on the
How to Use Page.
Those tips are for the most part repeated here:
|
Be mechanical and consistent! - It should be re-emphasized that utilizing a
consistent and purely mechanical approach to trading is of the utmost
importance. Trying to outguess the ranks, predict what they might do, and/or use
inconsistent trading rules is a sure recipe for losses. One way to implement a
mechanical approach is to simply shadow the model portfolio and trade when it
does. |
|
Check the ranks daily or at least twice a week. - The Select funds are more
volatile then the regular fund-track funds and are tracked more aggressively,
thus they can move up and down the ranks quite quickly at times. Reviewing the
ranks regularly is key to successfully utilizing this system. If you don't, you
forfeit the advantage it was developed to give. |
|
Once a trade is triggered, don't hesitate. - Fidelity gives you the opportunity
for intra-day hourly trading. With normal funds and brokerages you sell at the
day’s closing prices, and buy the following day. With Fidelity you can get sells
and buys on the hour. The model portfolio prices are pegged to the close of
every day. Once a trade is triggered (i.e. the fund you are holding goes to
"sell"), the earlier you can act the better. Set your trade upon the opening of
the following day, which should be executed at a price very close to the
previous day's close if not the same. |
|
Be prepared for losing trades and redemption fees. Expect them! - Know going
into a trade that you could be getting out of it in a matter of days with a loss
including a redemption fee. If you expect this going in, you will get out when
you are supposed to and "cut your losses". Holding a fund as most do attempting
to recoup your losses usually just makes matters worse. Know that going in! Another way to think about it is that the longer you hold onto
a losing fund, the greater the missed opportunity of getting into a fund that is
gaining. A mechanical, and objective approach as suggested above is the
solution. |
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Model portfolios were created to track the
success or failure of Fund-Track to compare and identify superior sectors at
any time under any market conditions. This ability to maintain a successful
mutual fund timing system is gauged by the return of the model portfolios.
They
utilize mechanical trading rules in that are recommended "How To Use " section
above. For a further explanation of "performance" see the Fund-Track
Performance page. The single fund model
portfolio was initiated at the beginning of 1999 with $10,000, and back-tested
to 1997. The Weekly averaging portfolio was initiated for 2003 and
back-tested to 2002. The single fund portfolio started with a hypothetical
amount of $10,000, while the weekly averaging portfolio started with $15,000.
All the ranks from which trades were trigged
for the model portfolios from the beginning of 2003 to the present (prior month)
can be seen on the "Past
Ranks" page.
Note: As of 9/2003 - The Profunds Bear fund
added to this rank in 2003 will be available to trade for the model portfolio.
Previously it was off limits and used strictly as a barometer of when to trade
out off any Select fund and into cash (Select Money Market). This
has been enabled by Fidelity dropping its 3% one-time front end load fee (In
9/2003), which forced investors to stay in Select funds.
For up to date views of performance go to the
Members Fidelity section
(membership required) or to the Monthly
Update
page for a look back at the previous month's performance
Fidelity Select Funds by Total Return,
Year End
2005 -- PDF
Fidelity Select Funds by Fund Category Avg Return,
Year End 2005- PDF
Fidelity Select
Weekly Averaging Model Portfolio 2005 - PDF
(page down to bottom)
Fidelity Select
Single Fund Rotation Model Portfolio 2005 - PDF
(page down to bottom)
Year End Review
|
|
2004
Return |
|
Weekly Averaging Model
Portfolio |
9.0% |
|
Single Fund Rotation
Model Portfolio |
-16.2% |
|
Nasdaq |
8.6% |
|
S&P Composite |
9.1% |
|
DJIA |
3.0% |
Fidelity Select Funds by Total Return,
Year End
2004 -- PDF
Fidelity Select Funds by Fund Category Avg Return,
Year End 2004- PDF
As seen in the first report above the average
year-to-date return for all Fidelity Select Funds at the close of the
year was 14.4%. The top fund for the year was the Medical
Delivery Fund which
returned over 45% for the year. Fo the year 39 of the 43 funds
finished with a positive gain for the year and 29 (67%) finished above the
NASDAQ index.
As seen in the second report above, the top fund
category for the year was utilities which gained 28% on average followed by
Natural Resources which gained over 21% on average. If it not for Gold
dragging it down, this category would have finished on top. The worst
category performer was technology fund which finished up just under 4% on
average. For the year the largest gainers were the utility and cyclical sector
type funds with gains of 20% for the year.
Year End Model Portfolio
Review
Fidelity Select
Weekly Averaging Model Portfolio 2004 - PDF
Fidelity Select
Single Fund Rotation Model Portfolio 2004 - PDF
As seen in the box above and on the PDF reports,
the Weekly Averaging portfolio out performed the Single fund rotation select
portfolio substantially. Again this year the single fund rotation
portfolio performed very poorly. (relative to the indexes and past gains) the weekly
averaging method was able to adjust to volatile market conditions more readily
then the single-fund method. It did this by being able to "average"
itself out over a few funds (up to 5) over time and thus not get caught in sharp
declines as did the single fund portfolio. For a more in depth discussion
of why this portfolio is able to perform better in current conditions see
the Fidelity Weekly Averaging page.
The Single Fund Rotation Model Portfolio
- This portfolio disappointed again with a
similar result to as what was seen in 2003. Very choppy market conditions
resulted in sharp and speedy price climbs and declines which this portfolio was
not able to capitalize on. Overall for 2004 this single fund method had a
hugely disappointing year as it continually triggered
trades into funds that had sharp and short lived trends. Most funds held by
the portfolio showed good initial strength then would sharply fade. These
moves thus prevented the model portfolio from getting into better positioned
funds showing more consistent strength.
After looking at such a poor trading
performance for this portfolio after such superior returns using the same rules
in past years (997 - 2003), the big difference this year again seems to be that not only are the
price swings bigger (volatility) but very much faster. This is something
not seen in the volatility measure because volatility as measured by standard
deviation is the variance in prices around and average, and doesn’t account for
the speed (rate) at which these prices change. This rate of change which
again was high this year in addition to 2003 has was the big reason I feel why the Select Fund-track
did not fare well. Time and time again a trade has been triggered into a fund
that had a very sharp run up, only to see losses as it turns down very quickly.
Also seen is the vast majority of trades made, much more this year, with average
hold times (in days) being much smaller then in previous years.
The Weekly Averaging model portfolio again out-performed
the single fund rotation model portfolio. As last year The single fund
rotation fund continues to perform very poorly in the current choppy market
conditions.
The single fund portfolio again was forced to make more trades then normal and
all taking short term redemption penalties of less then 30 days.
The weekly averaging portfolio was able to attain a decent return of 9.0% with
no early exits. For a
discussion of how these 2 strategies work see the How To
Use section.
Notes in looking at historical
performance of the 2 model portfolios used in this ranking system.
|
All redemption fees where
appropriate were assessed |
|
The 3% front end load was levied on the first trade
made for the single fund portfolio (no fee presently) |
|
Transaction costs were not included and are free
if traded with Fidelity online |
|
Intraday trading is available with Select funds
(hourly) and was
assumed by pegging buy and sells to funds closing prices.
|
for a year to year comparison of the
2 model portfolios, see the chart on the
Home page.
Fidelity Select Fund-Track Weekly Averaging Model Portfolio
Fidelity Select Fund-Track
Weekly Averaging Model Portfolio, 2002 - 2004 -- PDF
This trading method was developed in 2003 and
back-tested to 2002. It gained 9.6% in 2002 vs. - 31.5% for the Nasdaq and
19.6% for 2003 vs. 50% for the Nasdaq. In 2004 it gained 9.0% vs. 8.6
% for the Nasdaq index. Its performance vs. the
single fund model portfolio is discussed in the above section and on the
Fidelity Averaging page.
Fidelity Select Fund-Track Single Fund Model Portfolio
Fidelity Select Fund-Track Single Model Portfolio, 1997 - 2004 -- PDF
Over the years 1997 - 2004, the Fidelity Select
Fund-Track Single Fund Model Portfolio produced average annual gains of 24.7% over 12
trades a year, with an average fund holding time of 36.5 days. This
performance was achieved through back-testing the model portfolio using the
recommended trading rules discussed in the How To Use
section.
The file above details the performance attained for
years 1997 - 2004 for the single fund model portfolio . After reviewing this it may be a good idea to
re-read the "What To Expect" in the How It Works
section above to gain some insight into how this
system behaves.
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