Sector performance: Dispersion provides direction

Written by: Global Thought Leadership | September 30, 2016
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Source: Bloomberg, as of 9/26/16. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line

  • Looking at sector returns within the S&P 500 Index provides a good illustration of a potential advantage that active strategies can have over passive ones.
  • As the chart shows, sector1 performance varies, often significantly—and rebounds from downturns can be powerful.
  • That means active managers with the ability to overweight, underweight or even avoid certain sectors altogether have the potential to produce results that can differ from the underlying index to which passive strategies are tied.
  • Yet successful active managers don’t simply make guesses about the future direction of sectors based on recent absolute and relative performance.
  • Instead, when a sector comes under pressure (like Energy, Materials and Utilities in 2015) they may view it as fertile ground to look for new opportunities—or add to existing ones—in individual company stocks where significant gaps may have emerged between the current security price and what they think the business is really worth.
  • Conversely, price-value discrepancies can also arise in the other direction. If a sector has shown strong performance active managers may consider it an opportunity to scrutinize the valuations of holdings in that sector and consider reducing exposure.
  • Of course mispriced securities can also occur in sectors with just average recent performance, but big swings in either direction—especially in a relatively short period of time—often create more pronounced opportunities.


1 The S&P 500 is actually composed of 11 main sectors now. There are 10 sectors shown in the chart: Consumer Discretionary, Consumer Staples, Energy, Financials, Healthcare, Industrials, Information Technology, Materials, Telecommunications and Utilities. Recently REITS were added as the 11th sector, which is not represented in the chart.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.

Active management does not ensure gains or protect against market declines.