If you want to make money, you have to be a good… Sector picker

Many fund managers pried their ability to pick stocks, or, as the jargon goes « generate alpha » through stock selection (and with that the handsome fees they charge you). But the following 2 graphs show that rather than picking the right stocks, it’s better to pick the right sectors…

Sector-vs-Country-Picking-GS

Interesting comment from GS’s strategists:

« Dispersion across sectors is also more elevated than within sectors, indicating that the pick-up in dispersion of returns that we have seen since 2015 is more macro-driven than micro-driven. European sectors have been overridding stocks as a source of alpha since 2014 and it is more important to pick the right sector than the right stock. »

Sector-vs-Stock-Picking-GS

It’s very interesting to see that the charts bottomed at times when there was a massive distorsion in markets and investors were pilling up their money into very specific sectors: TMT’s at the end of the 90s; financials in 2006-07.

Today, the must have sectors are mostly defensive ones, or the so called « bond proxies » or « long duration » sectors like consumer staples, telcos, utilities.

As long as central banks distort the markets and push yield further down into negative territories, investors are probably going to keep on investing in those « defensive » sectors, which at some point from protect them when the direction of the market changes.

« Value » sectors, like banks, energy and some industrials are out of favor right now. And probably this will also last for some time.

One should not forget that Mr Market can change his mind very quickly… Beware of the saloon doors 🙂

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