A subscriber wrote in and said that if he wanted to take $200,000 from a portfolio of shares worth $1,200,000 off the table, how would he go about doing it? I really like this approach when the circumstances are right – so I wrote back and said that I would start by looking at my sector allocations first, before thinking about which individual stocks to reduce or exit. My sector allocation would, of course, reflect my investment bias – which often just boils down to whether growth or income is the main objective.
Of course, there can be a plurality of objectives, so while “growth’’ or ”income” can be a bit simple, for many investors, it is a starting point. With this in mind, here are our updated sector views for an income-oriented investor and a growth oriented investor.
Before turning to our allocations, it is worthwhile reflecting on the performances of the 11 different GICS (Global Industry Classification Standard) sectors. According to Standard and Poor’s, over the three years to 30 April, the so called “yield sectors” – financials, A-REITS (property trusts), utilities and telecommunications have each returned over 18.0% per annum. They have only been topped by healthcare, which has returned 30.5% per annum.
Interestingly, since the start of April, there has been somewhat of a reversal. The best performing sectors over the last three years (financials, A-REITs, utilities, healthcare) have underperformed the index, while laggards such as energy and materials have outperformed.
For income-oriented investors, here are our preferred sector allocations. For each sector, a position relative to the sector’s weighting on the S&P/ASX 200 is suggested – be it under-weight, index-weight or over-weight.
Despite income being the primary goal, to avoid too much tracking risk, we recommend that in the major sectors, some position is taken even if the view is under-weight. For example, the financials sector (excluding REITs) currently makes up 40.4% of the S&P/ASX 200 index – so an underweight position would see around 35% or less of your portfolio invested in these stocks; an index weight position around 35 to 45%; and an overweight position would potentially be 45% or higher.
Together with our sector view, we have listed the market leaders in each sector (by market capitalisation), and some brief comments.
For investors whose major objective is medium-term growth, here is our preferred sector allocation. Again, to reduce tracking risk, we recommend that some exposure is taken in each of the major sectors.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.