Newsletters 2009 Newsletters Portfolio X-Ray: Focus on Economic Sectors (9/11)
Friday, 11 September 2009 22:19
The recovery in the stock market continued without interruption in August with the S&P 500 Composite, Dow Jones Industrial Average and NASDAQ Composite rising 3.36%, 3.54% and 1.54% respectively for the month. Year to date through August, these important market barometers are up 12.99%, 8.2% and 27.4% respectively. Leadership by the NASDAQ Composite in general and technology stocks in particular has been impressive and nothing short of spectacular.
With the stock market collapse and credit crisis now hitting it’s one-year anniversary, we thought it would be interesting to review how Osher portfolios have performed relative to benchmark and assess to what extent sector weighting has played a role. Further, we will evaluate any potential clues that recent sector performance may provide about future returns. Consider the nearby table that compares how the equity component of Osher portfolios are weighted relative to both the S&P 500 and the Dow Joes Industrial Average, ranked by the top-performing sectors (within the S&P 500) year-to-date through September 4th:
| Performance | |||||
| Sector Weight | YTD | YTD | |||
| Osher | S&P 500 | DJIA | S&P | Osher | |
| Information Technology | 23.72% | 18.59% | 18.31% | 38.90% | 24.12% |
| Materials | 0% | 3.44% | 3.51% | 30.80% | NA |
| Consumer Discretionary | 4.08% | 9.14% | 8.73% | 21.80% | 7.97% |
| Financials | 7.73% | 14.94% | 11.40% | 13.10% | 4.46% |
| Utilities | 0% | 3.79% | 0% | 6.80% | NA |
| Health Care | 17.73% | 13.54% | 8.60% | 6.70% | 8.58% |
| Industrials | 16.67% | 10.15% | 19.29% | 6.10% | 12.49% |
| Consumer Staples | 25.69% | 11.55% | 14.61% | 3.60% | 11.89% |
| Telecommunication Services | 4.37% | 3.18% | 4.49% | 1.50% | 14.34% |
| Energy | 0% | 11.68% | 11.06% | 1.10% | NA |
| Osher Equity Composite | 16% | ||||
| Osher Firmwide Composite | 13.29% | ||||
| S&P 500 Composite | 12.53% | ||||
| Dow Jones Industrial Average | 7.58% | ||||
Given the strong relative performance of the Information Technology sector, it is clear that the decision to overweight Technology has played a significant role in our firm’s year-to-date outperformance. Our performance is even more impressive considering that the other sectors we have overweighted or equal-weighted (Health Care, Industrials, Consumer Staples and Telecommunications) have all underperformed the overall market and represent a substantial 64.5% of our equity holdings. Illustrating the importance of stock selection, even though these sectors have underperformed the market, each of these underperforming sectors within Osher portfolios has outperformed their market counterpart.
In managing portfolios, we use the S&P 500 Composite as our primary benchmark to help construct an optimal portfolio based on current economic conditions. With the S&P 500 serving as a proxy for the overall “market”, we evaluate portfolio allocation by economic sector relative to the S&P 500 benchmark and select which sectors we wish to “overweight” and which sectors we wish to “underweight”. We remain overweigthed in Technology, Health Care, Industrials and Consumer Staples. We have described this strategy as “barbell” in nature in that we have the more cyclical technology and industrial sectors offset by the more predictable health care and consumer staples sectors.
While it is always a happy outcome for our investment process to deliver results that outperform the benchmark, this is not necessarily our primary goal. Rather, our primary focus is to build portfolios that maximize gains while minimizing risk and that provide consistent income growth over time.
With the market recovery since the March lows having been lead by higher Beta (more volatile) sectors and areas of the market that were beaten down the most, we expect other sectors that have remained relatively stable throughout the crisis (such as Consumer Staples and Health Care) to play catch-up. The recent 40% premium offer from Kraft for core holding Cadbury may be a sign of better times ahead for sectors that have been left behind during the market’s sharp upward move. And regardless of sector, we remain convinced that companies able to deliver consistent earnings and dividend growth, without the need for excessive leverage, will provide long-term leadership in the “new normal” economic environment that we expect going forward.
While we are pleased that we have outperformed during this market recovery, we are especially pleased that we have also outperformed from the inception of the stock market collapse, August 31, 2008, through September 4, 2009:
| Osher Equity Composite | -12.51% | |||
| Osher Firmwide Composite | -9.05% | |||
| S&P 500 Composite | -20.77% | |||
| Dow Jones Industrial Average | -18.21% |
The ability to outperform our benchmark throughout the most extreme of both up and down markets is testament to the viability of our investment philosophy, sector allocation and stock selection.
Meanwhile, the better than expected economic news also continues with little interruption. Consider the following:
- Recent minutes from the Federal Reserve’s “Beige Book” suggests that risks to the U.S. economy have eased “considerably”. “Meeting participants agreed that incoming data and anecdotal evidence had strengthened their confidence that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year.”
- The International Monetary Fund (IMF) raised its forecast for global economic growth to 3% in 2010, up from their estimate of 2.5% made in July.
- The ISM Manufacturing index rose to 52.9 in August from 48.9 in July. ISM readings over 50 signify growth and this was the first reading over 50 since January 2008.
- China’s purchasing manager’s index rose in August at the highest pace in over one year.
- Japanese industrial output rose ahead of expectations in July.
- Led by France and Germany, the Euro-zone manufacturing purchasing manager index rose to a 14 month high in August.
- New U.S. home sales rose 9.6% in July, ahead of expectations and for the fourth consecutive month.
- U.S. durable goods jumped 4.9% in July, the biggest such gain in two years.
- Worker productivity rose at an annual rate of 6.6% during the second quarter of 2009, the fastest pace in almost six years when productivity jumped 9.7% in the third quarter of 2003.
- The University of Michigan consumer sentiment index rose to 70.2 in September, compared to 65.7 in August, the first increase since June.
We have written very recently about the propensity for higher inflation and a weaker dollar, and recently purchased a portfolio hedge in gold and commodities. Gold has risen back to $1,000 per ounce and the dollar has been especially weak of late. While these may be early indicators of what we expect will become more evident over the next year, the bond market seems to have shrugged off the potential threat. We will continue to keep a watchful eye on gold, the dollar and interest rates and keep you apprised of what they may be telling us.
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