The Dow Jones Index has fallen 3.42% for the year to 21 August 2001, outperforming the widely benchm...
The Dow Jones Index has fallen 3.42% for the year to 21 August 2001, outperforming the widely benchmarked S&P 500, which returned -9.08%, in dollar terms.
Simon Melluish, head of US equities at Gartmore, says the Dow Jones was predominantly an old economy index at least until May last year when Microsoft and Intel were added. He says: 'Prior to that IBM and Hewlett Packard were the only technology weightings and the Dow Jones underperformed.'
He adds that the major difference between the two indices is that the Dow Jones has 30 constituents whereas the S&P 500 covers a much broader spectrum.
Melluish says a lot of the difference in performance is attributable to relative weightings. He says: 'With the S&P 500 the largest weightings are smaller than those in the Dow Jones so have less impact. The top two holdings in the S&P 500 index are General Electric and Microsoft and as of the 21 August 2001 General Electric underperformed the S&P 500 by 7%.'
In the S&P Microsoft has a 3.1% weighting while GE makes up 3.85%. In the Dow Jones, Microsoft makes up 4.08% while GE is 2.75%.
Jackie Bowie, investment manager at Aegon Asset Management, says there should be no transfer by fund managers who benchmark against the S&P 500 to the Dow Jones, as they are significantly different indices. She adds: 'The Dow Jones is a price weighted index so stocks like IBM, whose shares always stay around £100, are big components of the index. This price weighting does not reflect the market cap or revenues. A company such as Microsoft has a lower price so a smaller weighting.'
She adds that the S&P 500 has been dragged down by the communications equipment sector.
'This sector includes companies such as Nortel and Cisco Systems, to which the Dow Jones has no exposure. The communications equipment sector is down around 60-70% this year.'
Individual stock performance has also led the Dow Jones to post better returns than the S&P 500, according to Bowie. She says: 'AT&T has been a good performer and it is one of the biggest components of the Dow Jones.'
In comparison, there are a number of S&P 500 components that have performed well but they are such small weightings that even accumulated together they do not make an impact to the index.
She adds: 'Consumer cyclicals have been top performers and make up a large portion of the Dow Jones.' Bowie adds: 'In terms of our exposure to the US we are fairly sector neutral as there has been a lot of sector rotation. We are trying to be specific at a stock level. We are still underweight General Electric and overweight Microsoft and in line to marginally overweight IBM.'
She also likes drug companies at the moment, the favourite being Pfizer.
She says: 'These companies perform well in uncertain economic environments and will be the first sector which we take profits from when the economy recovers.'
• Pharmaceuticals first to take profits.
• Dow Jones outperformed.
• Positive returns for consumer cyclicals.
Moves to overweight equities and fixed income
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