Is this one of the questions users often ask during the asset allocation phase, or how does industry choice (in terms of equity) affect portfolio performance?
Starting with the premise that, like the stock market in general, no one can predict the direction of the sectors either, it is certain that when we analyze the different phases of the economic cycle, we can begin to work on the so-called “segment” to choose the sectors that are best adapted to these The stage of the cycle in which we find ourselves.
It is no coincidence that in the period of Covid, for example, Warren Buffett sold all his shares in airlines, perhaps he was aware that at that very moment, not only the aircraft sector, but the transport sector in general (car sales in Europe are at 52% On an annual basis) it certainly wasn’t a good choice.
Of course it can be said that “these are exactly the moments when you buy at low prices”, but here we must take another step away from unique measures that often require an additional resource of time and analysis.
But then, let’s see how the choice of the sector affects in terms of numbers, adapting the equity part of the portfolio to the economic context …
I have built two portfolios (100% equity, 1 year time horizon, May 8, 2019 to May 2020, thus covering pre and post covid outbreak) consisting of the case of sectors that have suffered the most from covid impact (blue line), airlines, Fashion, tourism, construction, automobiles, chemicals).
In the second portfolio (bold blue line, technology, pharmaceuticals, food).
If it is already graphically clear how important the sectoral choice of wallet is in a tactical key, then the numbers under the picture also determine how well it is necessary to move well under certain conditions.
In particular, in the chart below, we see how all the parameters taken into account, for both performance and regression, are practically contradictory simply because they operate in different sectors.
Certainly, we repeat that no one can accurately predict certain things, but if for example the portfolio in February was adjusted according to this logic even partially, reducing negative sectors and buying more of these sectors
Therefore, knowing the dynamics of asset allocation again, knowing what the difference between strategic and tactical asset allocation means, and having a starter plan are elements that can contribute to improving our results.
In the same example, we can see in the image below, where the current period (here we see the graph from the beginning of the year) is penalized, among other things, the technology sector (which has done well in recent years) instead, the energy sector (see increase inflation and increase in raw materials), even if compared to the market in which the index is characterized.
Loyalty Research Source
How to deal with sectors
As far as tactical management is concerned at the sectoral level, the rotation approach can be evaluated (I do this in my portfolios), thus selecting, for example, a database of products (ETFs or funds) related to different sectors, and then “rotating” them monthly depending on some Filters (for example, setting the trend for a specific moving average, or setting the strength/momentum on the ROC).
Until next time!
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“This article has been written for informational purposes only; it does not constitute a solicitation, offer, advice, advice or investment recommendation, as it is not intended to encourage the purchase of assets in any way. Remember that any type of asset is valued on the basis of multiple viewpoints and is risky. extremely risky, and therefore all investment decisions and related risks remain under the responsibility.”