QInsight Group

Our Business Cycle Methodology

"Order and simplification are the first steps toward the mastery of a subject - the actual enemy is the unknown." 
Thomas Mann
(The Magic Mountain, 1924) 
 
The top-down portfolio selection process starts with the macro-economic business cycle model. QInsight has identified five U.S. business cycle phases, defined by a series of macro-economic variables including interest rates, real monetary measures, inflation and industrial production indexes. These phases of the business cycle were defined using data for the period from 1970 to 1996.
 
Using risk-adjusted returns, QInsight has identified the industry groups that have consistently outperformed the broad market indices in each of the five US business cycle phases. With this information, the top twenty five industry groups are selected for the current phase. These industry groups provide the basis for our equity and mutual fund portfolio selection.
 
To create QSector (industry group performance and subscription information), our specialty mutual fund portfolio, a rolling correlation table is maintained that links each of the top-ranked S&P industry groups to the most closely correlated (historically) specialty mutual funds. Usually, five to six specialty funds are selected for the portfolio.

To create QEquity (industry group performance and subscription information), our individual equity portfolio, the top-ranked companies in each of the top twenty-five industry groups are selected (from a universe of nearly 2200 mid- to large- capitalization stocks). The companies are ranked within their respective industry groups using fundamental and earnings factors that are unique to each industry group.

 
QInsight then uses a return-to-downside risk ranking system to select the final optimized portfolios of twenty to fifty stocks (for QEquity, the Model Equity Portfolio) or five to six sector mutual funds (for QSector, the Model Fund Portfolio). A measure of downside risk is used instead of the conventional variance or standard deviation. QInsight believes downside risk, which measures the risk of a stock under-performing a target rate, more closely represents investors' risk attitudes (i.e. the desire to outperform when markets or equities turn bearish).
 
Generally, the portfolios are maintained until a change in the business cycle phase requires a new portfolio selection process. On occasion, however, an individual stock may be replaced in the QEquity portfolio, and QSector allocations may be rebalanced monthly. On average, a typical business cycle phase lasts about 12 months, but phase changes may occur at any time. The QInsight Weekly Advisory service provides a commentary on the US business cycle, an economic trend analysis, and a discussion of the top performing industry sectors. This service is provided free of charge.
 
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