Wouldn’t it be great if you’d only had high performing mining stocks like Rio Tinto (RIO) and Fortescue (FMG) in your portfolio this year. They’ve returned 95% and 320% for the year to date, as against the ASX/S&P 300 return of just 17%. Or would it? While buying individual shares in the current hot sector might be great for the short term, for the longer term you need to broaden your scope beyond the current outperformers.
The fact is that unless you have your nose glued to the screen 24 hours a day you need to give some thought to the “d” word – diversification. A share portfolio that has a couple of shares from the one sector is at the mercy of the sector taking a dive and taking your portfolio down with it.
As Craig James, the chief equities economist of CommSec points out, if financial stocks were all you held in the past year, your portfolio would have been on a roller-coaster over the past few months. The sector was down nearly 1% over the past 6 months, dragged down by negative sentiment against all financial stocks – even those that didn’t go anywhere near the sub-prime mess.
Similarly mining and resources look great now, but if that’s all you own, you’re going to be very exposed if we see a blip in the economic juggernaut of China and India that is driving the huge demand for those kinds of stocks.
Spreading your portfolio across a number of sectors makes sense. But how do you do it? We’ll be looking at that more closely over the next few weeks – as well as nominating the best stocks to buy in each sector. But to get you started here are the 11 main sectors in the Australian sharemarket and some of their characteristics, the size of each sector and their performance in the past 3 and 12 months. (I’ve separated financials from property stocks because they are two very distinct sub-sectors even though they are both part of the Financials sector.)
SECTORS IN THE AUSTRALIAN SHARE MARKET
Source: Standard and Poor’s
Please note that the figures below are correct as of Dec 07, 2007. Performance figures include reinvested dividends. Source: IRESS.
Energy – 25 stocks
e.g. Oil Search, Santos, Woodside Petroleum
Market Cap: $87 billion
Makes up: 5.7% of the ASX/S&P 300
Performance: 3 months 10.4%, 1 year 37.8%
These are the companies that provide the fuel that powers our businesses and our everyday lives, or that provide the equipment and support services to harness it. A new and upcoming subgroup is the renewable energy sector.
Materials – 68 stocks
e.g. Boral, BHP, Lihir Gold
Market Cap: $365.4 billion
Makes up: 23.8% of the ASX/S&P 300
Performance: 3 months 16.2%, 1 year 49.8%
This a huge sector that includes the big mining companies as well as manufacturing companies that produce basic commodities like chemicals, glass, timber products and packaging. There is a big speculative aspect of this sector, with many smaller companies listing on the basis of exploration activities that haven’t delivered returns as yet.
Industrials – 43 stocks
e.g. Brambles, Toll Holdings, QANTAS
Market Cap: $128.5 billion
Makes up: 8.4% of the ASX/S&P 300
Performance: 3 months 1.5%, 1 year 19.5%
Industrial stocks include companies engaged in construction, engineering and building products, electrical engineering and building products as well as transport stocks. Some of the sub-sectors within this industry group, such as aviation stocks, have strong cyclical characteristics.
Consumer Discretionary- 35 stocks
e.g. Fairfax, Domino’s Pizza, Tabcorp
Market Cap: $86.7 billion
Makes up: 5.4% of the ASX/S&P 300
Performance: 3 months 1.1%, 1 year 5.3%
As the name suggests, these are the stocks that do well when the economy is doing well and retail spending is up, but be one of the first sectors to feel the pinch when confidence falls. Companies include media companies, hotels, homewares, the automotive industry and fashion manufacturing and retailing.
Consumer Staples – 14 stocks
e.g. Foster’s Group, Woolworths
Market Cap: $120.2 billion
Makes up: 7.8% of the ASX/S&P 300
Performance: 3 months 10.1%, 1 year 32.7%
When all else is looking grim, investors look to the consumer staples sector on the assumption that people always need to buy food and toothpaste, and that it takes a bit to put them off their beer or bottle of wine.
Health Care – 16 stocks
e.g. Symbion, CSL, Resmed
Market Cap: $46.5 billion
Makes up: 3% of the ASX/S&P 300
Performance: 3 months 4.8%, 1 year 26.9%
This is really two sub-sectors. First there are the big healthcare companies like Symbion that provide health related services. The other is what we normally think of as the biotech sector – more speculative companies involved in research and stgelopment of new pharmaceutical and biotechnology products.
Financials – ex Property Trusts- 32 stocks
e.g. AMP, NAB, Westpac
Market Cap: $480.6 billion
Makes up: 31.3% of the ASX/S&P 300
Performance: 3 months 2.4%, 1 year 14.5%
The big four banks plus smaller banks like Suncorp Metway and Bendigo are represented in this sector, but so are a host of other financial operators such as private equity firms, listed financial planning firms and mortgage brokers. Financials are closely connected to interest rates and the expansion of the economy.
Property Trusts – 32 stocks
e.g. GPT Group, Stockland, Westfield
Market Cap: $136.1 billion
Makes up: 8.9% of the ASX/S&P 300
Performance: 3 months -4.7%, 1 year 5.2%
Once a sector comprising companies that purely derived their earnings from rents on commercial, retail and industrial properties, property trusts have evolved over recent years to earn a lot more from stgelopment ventures, funds management and from holdings in overseas property assets.
Information Technology – 12 stocks
e.g. Computershare, IRESS Market Technology, MYOB
Market Cap: $10.9 billion
Makes up: 0.7% of the ASX/S&P 300
Performance: 3 months -2.5%, 1 year 12.3%
Once embraced in the tech boom, then despised when dotcoms went into meltdown, many IT stocks are these days solid sturdy performers. They include software stgelopers, as well as companies that provide consulting services, and manufacturers and distributors of hardware and equipment.
Telecommunications Services – 4 stocks
e.g. Hutchison, Singapore Telecommunications, Telstra
Market Cap: $53.4 billion
Makes up: 3.5% of the ASX/S&P 300
Performance: 3 months 7.2%, 1 year 33.7%
Telstra is the biggest stock on the index and dominates this sector, but other smaller stocks like Hutchison etc are also involved in the provision of communication services.
Utilities – 13 stocks
e.g. AGL Energy, Alinta, Envestra
Market Cap: $24.4 billion
Makes up: 1.6% of the ASX/S&P 300
Performance: 3 months -6.1%, 1 year 8.4%
Another solid steady sector that investors turn to in times of uncertainty although it’s had its share of upheaval with the ongoing battle between AGL and Alinta. This also includes a smattering of renewable energy providers.