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In my first book ‘Fair Share’ I wrote about sector analysis and provided the ‘weighting’ of each sector in the All Ords. In the book I also provided some strategies for managing sectors in your Portfolio so this is something of a potted version!
Basically the market is split up into sectors and major companies are allocated to sectors according to their business type. For example, CBA would be in the Financial sector, whereas BHP would be in the Materials sector.
Not all sectors have equal weighing. The Consumer Discretionary is about 10% of the All Ords, but Energy is less than 3%.
If you had all your eggs in the Energy Basket in the last month, you would have done very poorly if you were long. Had you been long on ‘Energy’ for the last couple of years, you would easily have doubled your money. Had you been 100% Telecommunications, you would have lost more than 20% over the same period.
Therefore actually knowing the sector weighting of your Portfolio and getting it right is so important. Sector weighting is not a static strategy. Some Managed Funds must follow the index and that is why at times we see Institutions shuffling when stocks move in and out of sectors as their ‘market capitalisation changes’
Unlike many fund managers you are not tied to following the precise sector weightings but if you want to track the All Ords then you should follow the weightings. I like the freedom of being able to ‘weight’ according to how I see sectors moving in the coming months. In this way you can achieve returns over and above the market.
My favourite sectors over the next 12 months are Energy and Materials, whilst my least favourite are the laggards of the past Discretionary stocks and Telecommunications. The latter are no surprises but the former are not so popular choices. Each week in http://www.sharesbulletin.com.au I do a sector review should you want more up-to-date reviews.
Nevertheless we may revisit sectors before year end.
Enjoy the ride
Tom Scollon
Chief Analyst
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