Courtesy of: Joseph Marchenia – Financial Advisor; John R. Weisgerber – Senior Vice President-Investments, Financial Advisor; Branch Name: Morgan Stanley Birmingham, MI; Phone Number: (248) 740-7125 or (248) 593-7542
Even today's slow-growth economy poses opportunities for investors who could take advantage of sector rotation.
Not long ago, sector investing was the province of institutional investors, who moved in and out of stocks in different industries to take advantage of cyclical changes in business activity. Today, this "sector rotation" strategy is readily accessible to individual investors through sector funds and exchange-traded funds (ETFs).
Sector Investing Defined
Simply put, sector investing is an investment strategy that involves identifying specific economic sectors and subsectors that are expected to outperform, and investing in strong companies within them.* It is a way of capitalizing on market shifts caused by changing business conditions and investor focus.
Fundamental to sector investing is the fact that different sectors and industries perform differently in different phases of the business cycle. Typically, growth sectors, such as information technology, do best during an expansion, while defensive sectors, such as food products and tobacco, fare better during a contraction. At any given time, some sectors will perform better than others, creating opportunities for investors.
The table below illustrates how the five largest sectors within the S&P 500 have ranked in terms of performance in recent years.
Leadership Rotation (Total Return)
As the table illustrates, no one sector consistently outperforms the S&P 500.
Source: Standard & Poor's Capital IQ Financial Communications. Sector performance is represented by the total returns of the top five GICS sectors within the S&P 500 for the five years ended December 31, 2012. Past performance is no guarantee of future results.
Where We Are Today
For sector investors, today's moderate-growth economic environment poses potential opportunities — and pitfalls — depending upon the sector and the prognosis for what lies ahead. In 2012, financials and consumer discretionary sectors outperformed traditional growth sectors such as industrials and information technology stocks, which were the hardest hit by the halting recovery (see table below).
Whether these same sectors continue to outperform for the remainder of the year will depend largely on the economy. If the recovery picks up steam, it may be reasonable to expect growth-oriented companies to benefit. On the other hand, if the recovery stalls or the economy slips back into recession, a shift back to defensive stocks might be in order. Thus, for the sector investor, it boils down to making a call on where the economy is headed, buying stocks of companies in sectors that stand most to gain, and selling those that stand to get hurt the most.
Sector Performance (Price Return)
Source: Standard & Poor's, U.S. Investment Policy Committee Notes, June 24, 2012. Past performance is no guarantee of future results.
Keep in mind, however, that sector shifts can occur quickly, and that unanticipated market shocks can derail even the most sophisticated investing strategy. That's why it's a good idea to limit your sector exposure to only a portion of your portfolio and to consider diversifying your sector exposure to more than one sector.
It's also wise to work with a Financial Advisor. I can help you identify the sector investments that may benefit from different economic scenarios and that complement your overall risk profile and asset allocation strategy.
Footnotes/Disclaimers
*Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.
If you'd like to learn more, please contact Joseph Marchenia & John R. Weisgerber; (248) 740-7125; (248) 593-7542.
Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.
The author(s) are not employees of Morgan Stanley Smith Barney LLC ("Morgan Stanley"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
An investment in a mutual fund or exchange-traded fund (ETF) involves risks similar to those of investing in a broadly based portfolio of equity securities traded on exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices. Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of mutual fund or ETF investments will fluctuate, so an investor's shares, if or when sold, may be worth more or less than the original cost.
Please consider the investment objectives, risks, and charges and expenses of the mutual fund or ETF carefully before investing. The prospectus contains this and other information about the mutual fund or ETF. You may obtain the appropriate prospectus by contacting a Morgan Stanley Financial Advisor. The prospectus should be read carefully before investing.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Past performance is no guarantee of future results.
The indexes are unmanaged. It is not possible to invest directly in an index.
This article does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Morgan Stanley Financial Advisor(s) engaged MASSP to feature this article.
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