The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns

CHAPTER 2

Sector Allocations

The only new thing in the world is the history you don't know.

Harry S. Truman

The average 7.75% expected 10-year annual return for equities forecast in Chapter 1 is based on investments in large-cap companies through the S&P 500 stock index. To increase the odds of outperforming, an erudite investor would examine all investments within this universe to potentially secure a higher average return. I believe that by utilizing sector investment strategies, an investor can gain a competitive edge over the masses.

Fidelity Investments is generally considered the first money management firm to promote sector investing. In 1981, Fidelity launched a supply of sector mutual funds (titled the “Select” series). Fidelity launched five unique sector funds focusing concentration on the health care, energy, technology, financials, and utility sectors. The firm followed this launch in 1985 with 14 additional sector funds. Although these offerings were popular with a small portion of the investor public, the modern era of sector investing began in 1998, with the launch of the Select Sector SPDR ETFs. The Select Sector SPDRs were the first ETFs to break into the mainstream marketplace, and all of the S&P 500 stocks were divided into nine sectors. The Select Sector SPDRs allowed investors to fine-tune their sector exposure to the U.S. market at a level never seen before and quickly became the established standard for accessing specific sectors of the market. In 1999, ...