The I Know First Sector Strategy:

I know First recently partnered up with Meitav investment house to launch an AI-run investment strategy. This strategy utilizes their AI algorithm to pick 40 of the best stocks and 2 industries. Now, they are looking to continue this partnership and create yet another fund. This fund is going to look a little different though and will challenge Barclay’s Shiller strategy.

The AI-Powered Investment Strategies by I Know First are designed to leverage the insights provided by our AI algorithmic forecasts, creating intelligent and dynamic portfolios that adapt to evolving market conditions. 

The “3 GICS Level 1 Strategy”, is built around a portfolio of three ETFs, each representing a different GICS Level 1 sector. The strategy is updated every four weeks based on the latest algorithmic forecasts. Each of the three selected sector ETFs has a maximum exposure of 25% within the portfolio, ensuring a balanced and diversified investment approach. The remaining portion of the portfolio is allocated to the SPDR S&P 500 ETF Trust (SPY), providing broad exposure to the U.S. equity market. The algorithm selects the GICS sectors based on a comprehensive analysis, identifying sectors with strong positive signals and high predictability scores. The Strategy includes a “rebalancing” every 4 weeks to allow the AI to adjust sector allocations dynamically based on evolving market trends. By focusing on sector rotation and capitalizing on emerging trends, this strategy maximizes returns while minimizing risk through diversification.

The Barclays Shiller Strategy:

Barclays also focuses on sector allocation, selecting 4 sectors out of 10 while excluding the SPY ETF. This strategy employs the CAPE (Cyclically Adjusted Price-to-Earnings) ratio, which adjusts earnings for inflation over 10 years, to identify undervalued sectors. Like I Know First, Barclays performs rebalancing every four weeks to update its sector picks.

Key Differences:

1. SPY Allocation: Meitav includes the SPY as a core holding, while Barclays avoids it, focusing solely on sector performance.
2. Selection Method: Meitav relies on AI to forecast top-performing sectors, while Barclays emphasizes valuation using the CAPE ratio.

Issues with CAPE Ratio:

Since its creation in 1988, the CAPE ratio has consistently underestimated the stock market’s performance. This is because it averages earnings over a 10-year period, failing to account for the rapid growth of major tech stocks like Apple, NVIDIA, and Microsoft. The drastic change in the weight of these companies in the market index over the past decade creates valuation errors.

For instance, NVIDIA’s current 7% weight reflects its 6,000% earnings growth over the last 10 years. However, the CAPE ratio factors in its tiny 0.06% weight from a decade ago, leading to an overvaluation unless one assumes its growth will reverse by 90%. When this effect is applied to entire sectors, the CAPE ratio likely skews their valuations as well.

Additionally, the CAPE ratio’s reliance on EPS (Earnings Per Share) further distorts its usefulness. It was found to correlate strongly with EPS movements, meaning that when EPS increases, the CAPE ratio often flags the market as overvalued, even if the growth is due to stock buybacks or dividends rather than genuine company expansion.

Performance:

The I Know First AI-powered sector rotation strategy has demonstrated impressive performance, outpacing both the S&P 500 and the Barclays Shiller strategy. Since 2020, this AI-driven approach has yielded a 117.8% return, averaging 29.45% annually. In comparison, the S&P 500 gained 84.86% over the same period, with an average annual return of 21.2%.

The Barclay’s Shiller strategy has done pretty well in recent years beating the S&P 50, however, not as well as I Know First’s Sector Strategy. In 2021, Barclay’s Shiller strategy did 27.89% on the year which didn’t even beat the S&P 500 benchmark of 28.71%. I Know First’s Sector Strategy excelled gaining 32.3% on the year. In 2022, the market had a big pullback with the S&P 500 going down over 18%. Barclay’s beat that by only going 14.29%. I Know First did even better by only going down 6.44% on a terrible year for the market.

The I Know First sector strategy, although not yet publicly released, has shown promising results in simulations based on unbiased AI-driven selections. This approach leverages advanced machine learning algorithms to analyze market data and identify potential opportunities across various sectors.

Key points of comparison:

1. I Know First sector strategy: 117.8% return (29.45% annually)
2. S&P 500: 84.86% return (21.2% annually)
3. Barclays Shiller strategy: ~15.36 annually (as of 2023). 

These results suggest that AI-powered investment strategies, such as the I Know First sector rotation approach, have the potential to outperform both traditional market indices and established quantitative strategies.

Conclusion:

Both funds present compelling approaches to sector investing. I Know First’s AI-driven flexibility adapts to market changes in real time, while Barclays’ valuation-based approach offers a historically grounded perspective. The choice between these strategies depends on whether an investor prefers a cutting-edge predictive model or a valuation-focused methodology.