In the most general terms, as I see it, a professional portfolio manager creates a structure for holdings that deliberately deviates from that of a target index in a way the manager thinks will end up performing better than the index.
Conceptually, there are two main ways of doing this: by selecting individual stocks or by choosing sectors that the manager thinks will do better than the index. Some managers are more comfortable with creating a sector structure based on reading macroeconomic signals and then filling the sectors in with individual names; some do the opposite, select individual stocks they like and let that selection process create a sector structure more or less by default. Taking either approach without awareness of the other is risky. To my mind, there’s nothing worse than having a string of good ideas but not having position sizes that work against your intentions–usually, in my experience, by being too small.
I have two strong sector views. The first is Energy. I think we’ve finally reached peak global oil usage. If that’s correct, the combination of big oils and OPEC will seek to keep oil production constrained. Nuclear is something I know nothing about but I really have to get myself up to speed on.
The second is Utilities. Electric utilities have been on life support since I entered the stock market in 1978. No longer. AI demand. The short story is that regulators will have to boost allowable returns in order for utilities to raise money for expansion.
I also think that sectors that benefit from economic expansion, like Industrials and Materials are likely to have a hard time next year. Consumer discretionary is big enough that there’s always something to buy. My guess is it’s the lower end–think, Walmart (which I own stock in), avoid luxury (China’s a big reason here).
That leaves secular growth areas like IT and Communication services in my plus column.
Then there are what I would broadly characterize as special situations–meaning, in essence, I think it probably would be good to have some value names in the portfolio, especially in a year when Trump, who has shown a knack in his business career for turning silk purses into sows’ ears, will be back in power.
more tomorrow