Sector exposure remains more important than market cap positioning as traditional growth areas of th...
Sector exposure remains more important than market cap positioning as traditional growth areas of the market continue to underperform.
Only 12 of the S&P 500's 123 sectors have returned positive growth over the 12 months to the end of September, topped by the S&P gold index, up 19.16%.
The top and bottom 10 performing sectors straddle the market cap spectrum but are clearly split by industry type, with more traditional or old economy sectors leading the way.
Metal and glass, housewares, casinos and gaming, brewers, healthcare and managed health companies have all, on average, posted double-digit growth over the 12 months to the end of September.
By contrast, the wireless services, IT, telecoms equipment and electronic equipment, semi-conductor and application software sectors have posted negative returns in excess of 50%.
John Hatherly, head of research at M&G, stresses the importance of sector positioning versus market cap positioning as a means to mitigate risk and generate excess returns.
He says: 'The concept of a growth sector has more or less been exploded. Technology, media and telecoms have gone and support services and pharmaceuticals have also been derated. You cannot always equate small with growth and, over the course of the current bear market, all so-called growth markets have come under question.
'While there has been exceptional polarisation between different sectors, it is difficult to find any meaningful comparison between small and large companies.'
The performance of the FTSE All-Share has been similar in terms of sectoral difference. In the absence of any significant gold constituent, tobacco has led the way over the past 12 months, posting double-digit growth, closely followed by pet care and household products, with food production the only other sector in positive territory. IT, software, telecoms and insurance again feature as the worst performers.
Given the dominance of the FTSE 100 by the top four sectors, more than 60% of the market in oils, financials, telecoms or pharmaceuticals compared to around 5% of the small-cap universe in these sectors, meaningful comparisons are difficult.
Given the homogeneity of sectoral performance across geographical borders, top-down asset allocation, in terms of country weightings, has been driven predominantly by the constituents of different indices, such as an overweighting of the typically more defensive UK market.
Ian McLeish, manager of the Scottish Investment Trust, is overweight the UK for that very reason. He is also increasingly looking at Europe, where valuations are on low and dividend yields attractive versus the returns available from cash and bonds. McLeish still feels US cyclicals are overvalued and remains bearish on technology. He is underweight Japanese stocks geared to consumer spending, favouring alternative Asian markets.
Hatherly notes while the top performing tobacco stocks are large caps, so too are underperforming pharmaceuticals. Conversely, strong performing housebuilders are in the main small caps, but so too are the beaten down technology companies.
Blue chips due a rally.
Small caps on attractive valuations.
Defensive UK market outperforming.
Trading volumes thin in small caps.
Derating of growth sectors continues.
No sign of market volatility abating.
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