If only you had loaded up on technology stocks in the late '90s and dumped them before the dot-com bust. Or jumped into commodities before they went gangbusters in 2007. Perhaps if you had foreseen the recent market collapse and moved all of your money into treasuries. But unless your trading abilities include psychic perception, it's not likely that you make the right calls all of the time.
Sure enough, there are funds that aim to do just that. One such is the Huntington Rotating Markets Fund, which invests in what's hot—be it a small slice of the market, like gold, or a broader category, such as large companies—and dumps (or avoids) what's not. The fund, which uses exchange-traded funds to gain exposure to a segment of the market, is currently almost fully invested in emerging markets, including Brazil, Taiwan, China, and Russia, according to manager Paul Koscik. "They're cheaper than the U.S., and if you look at growth rates, they're much higher," he says. "Investors tend to gravitate to areas of the market with great growth that they don't have to pay much for, so that's where the money goes. I think it's possible that in the next year we'll see a bubble in emerging markets."
The key, of course, is getting out before the bubble bursts.
[For more on investing in exchange-traded funds, see The Case Against (Some) ETFs.]
Momentum. A trend-seeking fund with a different strategy is Rydex All-Cap Opportunity (formerly the Rydex Sector Rotation fund), which moves its investments between sectors using a ranking system that spits out industries showing the strongest price momentum each day (based on three- and 12-month performance). It then takes the top 10 percent of industries and invests in stocks within them. When an industry falls below the top 20 percent in either time frame, Rydex sells. This quantitative system "eliminates the need for subjective market-timing positions," according to the fund's prospectus. Recently, its top holdings included market behemoths such as Procter & Gamble, Amazon, Colgate-Palmolive, and Coca-Cola.
Performance. Rotation strategies are tricky to execute. "Trying to pick sectors at different moments is a very difficult thing to do," says John Coumarianos, a mutual fund analyst at Morningstar. "Some value managers are invariably overweight one way or another, but that's because it's stock-by-stock analysis that leads them to one area of the market."
Although both the Rydex and Huntington funds have outperformed the S&P 500 over the past five years by 4 percentage points and 3 percentage points, respectively, their performance has been lumpy during some calendar years. Mickey Cargile, managing partner of WNB Private Client Services in Midland, Texas, is lukewarm on sector-rotation strategies (he has used Rydex Sector Rotation in some client portfolios.) "It has periods where it does well and vice versa, so it's almost like a sector in itself," he says. "My opinion of it is mixed, because performance is sometimes there and sometimes not."
The case for flexibility. No one's certain what the market will look like post-bust, but, according to Ronald Rogé, CEO of R.W. Rogé & Co., a Bohemia, N.Y., wealth management firm, "the name of the game is to be able to be in front of changes taking place and be there before market gets there. We're going to go through a sequence of events that the government controls so we're looking at opportunities to take advantage of what comes out of SEC regulations and being very, very cautious." Another type of fund that favors certain areas of the market—but doesn't just focus on one idea or a handful of sectors—is an asset allocation fund. Rogé likes the flexibility of Pimco All Asset All Authority, which invests in other Pimco funds and emphasizes different asset classes depending on which offer the most value at a particular point in the market cycle. Recently, the fund's assets were divided among several asset classes, including U.S. bond strategies, inflation-related strategies, and alternative-bond strategies.
[Also see 6 Mutual Funds for the Long Haul.]