As a participant in today's financial industry, you can't afford to become a prisoner of your own past thinking. Periodically, advisors should examine old ideas in a new light. Techniques ridiculed as nonsense a few years ago may make good sense for you and your clients today.
An example may be the concepts of "sector-based investing" and "sector rotation." In this article, I'll suggest why you should open your mind to these ideas.
As you know, the U.S. stock market is divided among broad sectors of economic activity that are tracked differently by various research services. For example, Barron's tracks eight sectors and Morningstar 12. However, the investment world is now rallying around one standard for sector-based analysis called "Global Industry Classification Standard (GICS)." Jointly developed by Morgan Stanley Capital International and Standard & Poor's, GICS currently divides stock markets into 10 sectors, 23 industry groups, and 59 industries. You can learn details about GICS at:
The market weightings of the 10 U.S. market GIC sectors, as a percentage of the S&P 500 Index as of 12/31/02, are shown below. This table also shows their weightings in the S&P BARRA Large-Cap Growth and Large-Cap Value sub-indexes.
| GICS Sector Weightings as of 1/31/03 | |||
| S&P 500 | LC Growth | LC Value | |
| Consumer discretionary | 13.4% | 12.1% | 14.8% |
| Consumer staples | 9.5% | 16.7% | 2.1% |
| Energy | 6.0% | 0.1% | 12.0% |
| Financials | 20.5% | 5.7% | 35.4% |
| Health care | 14.9% | 27.3% | 2.4% |
| Industrial | 11.5% | 12.6% | 10.5% |
| Information tech. | 14.3% | 21.7% | 6.7% |
| Materials | 2.8% | 0.8% | 4.9% |
| Telecom | 4.2% | 3.0% | 5.4% |
| Utilities | 2.9% | 0.0% | 5.8% |
Source: Morgan Stanley Quantitative Research
- A sector-based investment discipline allocates a client's assets among these 10 areas based on a broad diversification strategy, while often seeking to overweight or underweight specific sectors relative to the index.
- A sector rotation strategy seeks to increase returns by varying these weightings as an economic cycle progresses.
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