Sector investing

[Harvey Specter]

Does anyone take a sector approach to investing. That is, allocate a % of your portfolio to a sector and then look at each sector and pick the one they determine will do best.

Energy: CEN, TPW, MRP, MEL, GEN
Retirement : RYM, SUM, MET, smaller ones

EG. you might allocate 15% to energy and determine that CEN is currently the best pick and 10% to retirement and pick MET as the best.

Or do you diversify across the sector - eg. hold all/most but hold in different weightings depending on view

Or do you just pick the best stock - eg compare CEN to MET and pick the best.

[Snoopy]

Does anyone take a sector approach to investing. That is, allocate a % of your portfolio to a sector and then look at each sector and pick the one they determine will do best.

Energy: CEN, TPW, MRP, MEL, GEN
Retirement : RYM, SUM, MET, smaller ones

EG. you might allocate 15% to energy and determine that CEN is currently the best pick and 10% to retirement and pick MET as the best.

Or do you diversify across the sector - eg. hold all/most but hold in different weightings depending on view

Or do you just pick the best stock - eg compare CEN to MET and pick the best.

I 'kind of' do this Harvey. My current strategy is to invest in about a dozen NZ companies with a low speculative bias. The dozen are not held in equal amounts because my portfolio is a 'work in progress'. I tend to focus on 'food' 'clothing' 'shelter', the basic three needs of humanity for which demand is unlikely to dry up. However I make an immediate lie of this by investing in the farming sector (via PGW) and various NZ Manufacturers (SCT and SKL) too.

Under the 'shelter' umbrella I put the power companies. As it happens I hold roughly equal holdings of MRP and CEN, with a rather smaller helping of GNE. That smaller helping of GNE is not by design. It is because I like everyone else was restricted in what I could buy at float time.

I like to hold two shares in any targeted sector, to negate individual company risk and to give me a force feed of information on what the competition is up to. I view my holdings of CEN/GNE and MRP as 'one' from an investement perspective (but 'three' from my portfolio of 12). I am comfortable with holding around 1/4 of my NZX portfolio in the electricity sector. But currently my electricity sector investment is significantly less than that. This means I have the problem of three relatively underweight holdings and what to do with them. One is targeted for the chop, but which one?

I can't answer this question for sure, but long term I want the two best companies in the sector provided I don't have to pay an exorbitant price to buy into them.

SNOOPY

[Harvey Specter]

Thanks Snoop' Interesting point re holding too.

The reason for my question is I currently hold all Gentailers and think that this is the wrong approach. Likewise, I previously owned all retirement villages but over time sold out of them as I thought the sector was overvalued.

I'm wondering if a better approach is to focus more on 1 (or 2) in each sector rather than be over-diversified in which case I may aswell just buy the index. By doing this I remove sector risk compared to the index by remain in the sector but focusing on those companies that will (hopefully) outperform the index.

[Snoopy]

I'm wondering if a better approach is to focus more on 1 (or 2) in each sector rather than be over-diversified in which case I may aswell just buy the index. By doing this I remove sector risk compared to the index by remain in the sector but focusing on those companies that will (hopefully) outperform the index.


What you have outlined is basically the approach I now take Harvey, or am at least working towards! There is an argument that if you invest in many sectors, then you could just pick the one best in each sector. While that opens you up to individual company risk in one sector, from a portfolio perspective you remain diversified.

The power sector in NZ is a bit of strange case, because there really is only one power market. So you could argue gentailing in New Zealand is a zero sum game, and there is some doubt as to whether that game overall is expanding or not.

Personally I find reading one gentailers Annual Report is a real help in understanding what the others are doing. This together with my lack of conviction that I can pick the one 'best' company, will see me continue to invest in at least two gentailers going forwards from here.

SNOOPY

[Snoopy]

I tend to end up invested in sectors by accident as I find some sectors run hot and I move in to take advantage of all the opportunities. I had a good run owning all the small telecommunications companies for instance. Then a lot of the small financials. Now I'm mostly in healthcare and technology companies.


Interestingly I take the opposite approach. I stay right away from any sectors that are 'running hot' because those are exactly the kind of conditions that will eventually (and perhaps presently?) see those shares fundamentally overvalued. I am currently running a mile from any investments in Saas companies. This isn't becasue I don't like Saas as a business model. It is because I perceive the price of most of the shares in this sector as way too high.

This way I avoid all trendy shares but also avoid all the blow ups when these sectors run out of steam.



I avoid sectors deliberately though - won't touch anything in the materials/energy sector for instance. The China slowdown is going to last for years!


Opposite again! I am now trawling the bones of those material and mineral companies that were last sharemarkets season's hot thing. Hence my interest over the last six months in Arrium, which isn't the iron ore play that most think it is. Of course you need to have the extreme patience to allow such a strategy to work itself through and not worry about what Mr Market is up to on the way.

SNOOPY

[percy]

I tend to end up invested in sectors by accident as I find some sectors run hot and I move in to take advantage of all the opportunities. I had a good run owning all the small telecommunications companies for instance. Then a lot of the small financials. Now I'm mostly in healthcare and technology companies.

I avoid sectors deliberately though - won't touch anything in the materials/energy sector for instance. The China slowdown is going to last for years!

I think it is wise to look at different sectors.
Aging population makes health and retirement sector great investments.I think if the sector runs too hot it pays to take some profits.ie RYM and SUM got ahead of themselves.I hold EBO and FPH.
Changing habits,like buying online means companies like Estaronline [web pages for Esibuy?briscoes etc] and distribution changes open opportunities for courier companies such as FRE.
Government selling off power companies opened the flood gates for easy profits.I invested in GNE and MEL and only hold MEL.
Infrastructure companies always add strength to a portfolio.I hold POT and AIA.
Travel.Cheaper travel,with more people being able to afford to travel means I hold AIR.
Banking/Finance.Banks provide finance for an economy to grow, and for people to borrow for things they want.They have a long history of looking after shareholders.I hold HNZ.
Farming/rural sector is the back bone of NZ's economy.I find it hard to know which companies are the best in this sector,so I hold SCL,SEK,PGW,CVT,and REL [unlisted market].I sold SML as they overshot what I thought was fair value.I expect in a couple of years I will end up only owning two companies in this sector.The poor performers will be sold and the performers added to.
Education.the government has signalled more investment in this sector,and with Alison Paterson joining the board of IQE I brought a few.
Employment sector.AWF gives me the exposure here I want.
Personal care.TIL appear to have excellent skincare/beauty products.
A bob each way sector.HBY gives me a diversified investment company,although it is their successful history in the motor trade that attracts me.
Prejudice...Retail and manufacturing in NZ are sectors I avoid.
Also try and keep it simple.The more complicated it is the more chance of error,as a lot of poor clever people will tell you.

[Snoopy]

Interestingly I take the opposite approach.


Rereading my post I may have created a wrong impression. I am not suggesting the approach of KW is wrong. I am saying that is you have a different investment timeframe and don't care about what Mr Market is doing in the interim, you can still get a satisfactory investment result by following a different strategy.

SNOOPY

[PSE]

Please consider Snoop and Harvey the nature of the gentailer's assets when choosing which to keep.
MEL has the longest life and best (hydro) stations but may trade at a multiple of book value to account for this.

[Snoopy]

Please consider Snoop and Harvey the nature of the gentailer's assets when choosing which to keep.
MEL has the longest life and best (hydro) stations but may trade at a multiple of book value to account for this.


I don't question the quality of Meridian's assets. I do question the mix of assets. Both MRP and CEN have a good whack of hydro and geothermal energy. Geothermal energy is also renewable, but is not 'weather dependent'. So this gives MRP and CEN a better opportunity to manage their, ahem, 'lower quality' hydro assets over different seasonal weather patterns. This is why I prefer MRP and CEN over MEL going forwards.

SNOOPY

[GTM 3442]

Sectors are great for a core-satellite portfolio, especially internationally.

The core is ETFs across S&P, SMI, DAX, etc. - the big "general" indices.

The satellites are ETFs which hang round the specialized indices (defense, healthcare, biotech, etc).

Then, of course, you have to decide about currency. . .

[Joshuatree]

Ive done well (mainly) with pairings in sectors
FPH and RMD in Healthcare
ZEL and NZR retail and refining fuels
MEL and Genesis Power gen and retail
AOG and EHE in retrement villages in Aus
VOC and AMM ,telco merger in progress thru VOC in Aus
SKE and PRG providers of staffing ,merger in progress thru SKE(s/p up today) in Aus
a bunch of Goldies whose time is arriving ( i hope).

[GTM 3442]

Ive done well (mainly) with pairings in sectors
FPH and RMD in Healthcare
ZEL and NZR retail and refining fuels
MEL and Genesis Power gen and retail
AOG and EHE in retrement villages in Aus
VOC and AMM ,telco merger in progress thru VOC in Aus
SKE and PRG providers of staffing ,merger in progress thru SKE(s/p up today) in Aus
a bunch of Goldies whose time is arriving ( i hope).

A bit specific for me, I'm afraid. I'm quite happy picking sectors, but less keen on picking individual stocks within my selected sectors.

[fish]

I 'kind of' do this Harvey. My current strategy is to invest in about a dozen NZ companies with a low speculative bias. The dozen are not held in equal amounts because my portfolio is a 'work in progress'. I tend to focus on 'food' 'clothing' 'shelter', the basic three needs of humanity for which demand is unlikely to dry up. However I make an immediate lie of this by investing in the farming sector (via PGW) and various NZ Manufacturers (SCT and SKL) too.

Under the 'shelter' umbrella I put the power companies. As it happens I hold roughly equal holdings of MRP and CEN, with a rather smaller helping of GNE. That smaller helping of GNE is not by design. It is because I like everyone else was restricted in what I could buy at float time.

I like to hold two shares in any targeted sector, to negate individual company risk and to give me a force feed of information on what the competition is up to. I view my holdings of CEN/GNE and MRP as 'one' from an investement perspective (but 'three' from my portfolio of 12). I am comfortable with holding around 1/4 of my NZX portfolio in the electricity sector. But currently my electricity sector investment is significantly less than that. This means I have the problem of three relatively underweight holdings and what to do with them. One is targeted for the chop, but which one?

I can't answer this question for sure, but long term I want the two best companies in the sector provided I don't have to pay an exorbitant price to buy into them.

SNOOPY
.
Snoopy no doubt your work in progress will include the impact of falling interest rates on company profits.
Also falling exchange rates have an impact if the investment is in us dollars.
borrowings in the form of long-term bonds must also negate any advantage.
Looking at the power companies are there any in a position to reduce their borrowing costs?
Looking at chorus-will it help their profits?