Stock Sector Allocation

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chufinora
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Stock Sector Allocation

Post by chufinora »

I am thinking that I would like to get a bit more rigorous in my stock sector allocation. Currently I use the following sectors (With my target allocation)

Telecoms 10%
Utilities 15% (This includes pipelines)
Industrials 8%
Real Estate 10% (REITs)
Resources 5% (This is materials and energy stocks)
Healthcare 8%
Consumer 10%
Technology 5%
Mixed 15% (This is catch-all for broad ETF’s like XIU, I don’t have the patience/energy to try and break out the ETF’s and assign partial weights to the other sectors)

I would like to find a good strategy on sector/sector allocations. Looking at this industry browser at yahoo http://biz.yahoo.com/p/s_conamed.html it appears I do not even have the right sectors. It lists as the high level sectors

Basic Materials
Conglomerates (?)
Consumer
Financial
Healthcare
Industrial
Services (? Not sure I can clearly see the difference between this and consumer)
Technology (Which appears to include my Telecoms sector)
Utilities

And Real Estate is not considered an industry?

I am interested in how others pick their target sector allocations. Is there a better sector list for investors that is more commonly used? I have read that choosing the right allocation is more important than individual stock picks, but it looks like I am struggling to even define the right sectors.
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Re: Stock Sector Allocation

Post by Peculiar_Investor »

I believe that the most commonly used sector definitions is GICS® from MSCI and S&P:
The Global Industry Classification Standard (GICS®) was developed by MSCI, a premier independent provider of global indices and benchmark-related products and services, and Standard & Poor's (S&P), an independent international financial data and investment services company and a leading provider of global equity indices.
The The GICS structure consists of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries. You can review their current sector definitions in GICS Sector Definitions - Current Sector Definitions.
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Re: Stock Sector Allocation

Post by like_to_retire »

I use ishares XIC sector descriptions and also its assignments. The assignment of which sector a particular stock represents is another problem. For example, TRP (Transcanada Corp) is classed as energy by ishares, but it could also be classed as utilities by others. Or SJR.B (Shaw Communications) is classed as Consumer Discretionary, but may also be classed as Telecom.

ishares XIC uses 10 sectors:

Financial
Energy
Utilities
Telecom
Industrials
Materials
Consumer Discretionary
Consumer Staple
Health Care
Information Technology

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Re: Stock Sector Allocation

Post by Peculiar_Investor »

Sorry, was stepping out and wanted to quickly post about the standard for sector definitions. There is also some previous discussion in Stock sectors. IIRC, it comes up periodically and there are probably other related topics as well. The challenge doesn't seem to be the sector definitions per GICS, rather as ltr points out, there isn't always consistency in the sector classification of individual issues. An alternative sector classification that gets occasional mention, particularly for retail investors, is the system from The Investment Reporter newsletter. They've reduced the number down to what they consider "economic sectors": Manufacturing, Resources, Consumer, Financial, Utility and Multi-sector (X).

Broad based indexers select their sector weights by market capitalization. One of the criticisms of the Canadian equity market is the heavy market capitalization in just three sectors (Financial, Energy and Materials). One solution that often gets mentioned is combined broad based Canadian and US indices which "normalizes" things somewhat, depending on the Canada to US split. There is a pretty decent summary of the issues and solutions in Portfolio design and construction - finiki, the Canadian financial wiki.

Real Estate is generally classified in a separate asset class, per the Canadian Investment Funds Standards Committee (CIFSC).

Sector weights within a portfolio likely depend on whether you are a bottom-up stock picker or a top-down stock picker. Bottom-up stock pickers tend to select their best ideas, regardless of sector and therefore tend to stray far from broad indexes. Top-down stock pickers tend to follow along sector lines and therefore their portfolio would more closely resemble an index and sometimes can be called closet indexers. For active mutual fund managers, the concept of "active share" has been coined, see Active Share Measures Active Management for more information. Rob Carrick of the G&M offers another method, the "Two-Minute Porfolio", see The Two-Minute Portfolio beat the TSX last year - The Globe and Mail.

Personally, I'm a bottom up stock picker who attempts to find the best businesses I can buy and hold. My tracking spreadsheet does include sector classifications and I do spot-check vs a weighted S&P/TSX and S&P 500 benchmark. I use the information more to identify potential holes and over concentration, but I don't set specific targets for sectors.
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Re: Stock Sector Allocation

Post by Peculiar_Investor »

The following comes from some discussion in another topic (click the ↑ below if to want to follow along):
thedude99 wrote: 10 Feb 2018 14:21
Peculiar_Investor wrote: 10 Feb 2018 09:39 Our allocation to the financial sector is now essentially at our target weight, which is NOT the S&P/TSX weighting.
What % of your portfolio is in the banks? I'm about 9% overall which is higher than i would like but would be facing some tax hits if I reduced too much. This includes MFC and SLF but for the most part it's all in 4 of the 5 Cdn banks
My benchmark for sector weightings is a weighted S&P/TSX & S&P 500 sector weighting. In the ideal world with 10 sectors (I haven't started to count Real Estate separately), I would hope every sector would be around 10%. I realize that's not inline with the theory of weighting by market capitalization, but it partially addresses the over concentration in three sectors in Canada.
P_I sector weighting.JPG
Click for big
I update the S&P/TSX and S&P 500 weights quarterly.

The assiduous reader (tip of the hat to James Hymas) might notice that Utilities and Energy are essentially absent in our holdings. The explanation is my spouse works in the utilities sector and was previously in the energy sector, so there is intentional career related diversification away from those sectors. Hint: Lesson learned from my days at Nortel when career, stock options, and employee stock plan were all tied up in one place. When things were going well, the total lack of diversification was good. When things turned, not so much.
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Re: Stock Sector Allocation

Post by Taggart »

The RRSP's and TFSA's are all in index funds/ETF's in a Global portfolio, so I just let the sectors take care of themselves.

The taxable portfolio is all in individual Canadian dividend growth stocks.

After the severe market drops in the early 2000's and then again in 2008 to early 2009 I got a little queasy about having too much in any one sector. In 2010 I did a total revamp of the sector allocation in the taxable.

Since 2010 I've only made a few minor changes to this allocation. Some of the title names could be classed as sectors and others as industrial classifications, but they are only for my own use, and to me it doesn't really matter if it gets outside approval or not.

The following is for the portfolio as of today. The percentages are targets.

Consumer Discretionary 15%

Consumer Staples 15%

Energy - Pipelines 15%

Financials 15%

Industrials 15%

Telecommunications 10%

Electrical Utilities 15%

You'll note that six sectors are targeted at 15% while the seventh has only 10%. This is because I have a maximum target of 5% in any one stock and for the last few years I can only find two Telecom companies that have raised their dividends recently, hence only 10% sector allocation. Whichever sector above is down the most, gets any new investment cash. Since the sector allocation changes the portfolio has never been tested in a severe market downturn as of yet, so I'll know after any that are forthcoming whether any further changes have to be made. I'm not expecting to, but one never knows until after the financial storm.

So far the portfolio has been super simple to run. Just the way I like it.
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Re: Stock Sector Allocation

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Taggart wrote: 10 Feb 2018 18:07 Some of the title names could be classed as sectors and others as industrial classifications, but they are only for my own use, and to me it doesn't really matter if it gets outside approval or not.
Fair enough if it works for you. Do you make any attempt to map the GICS sectors into your personalize version? I reason I ask is I'm left to wonder how someone else could learn and implement something similar.

When you look at specific stocks, what process do you follow to map it into your sector classification? Do you start with whatever TSX indicates as the Industry Classification:Sector? Or do you make your own judgement?
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Re: Stock Sector Allocation

Post by Taggart »

Peculiar_Investor wrote: 10 Feb 2018 18:54
Taggart wrote: 10 Feb 2018 18:07 Some of the title names could be classed as sectors and others as industrial classifications, but they are only for my own use, and to me it doesn't really matter if it gets outside approval or not.
Fair enough if it works for you. Do you make any attempt to map the GICS sectors into your personalize version? I reason I ask is I'm left to wonder how someone else could learn and implement something similar.
I looked at the GICS sectors you kindly posted and mine is similar except you'll note I've skipped the Materials, Information Technology and Health Care sectors in Canada. None of the Canadian stocks in these three sectors interest me enough to buy into.

When I first started on this, I originally took a look at what stocks were in which sector in XIC over at Blackrock. At their website I could click on All Holdings and then click again on Sector to find which stocks were listed there.

Since then, all the Canadian dividend growth stocks I'm interested in are on a watch list in a spread sheet, broken down by sector. I've got it set up so that after I do my month end update, I can tell at a glance which sectors are doing well, and which are not.

Peculiar_Investor wrote: 10 Feb 2018 18:54 When you look at specific stocks, what process do you follow to map it into your sector classification? Do you start with whatever TSX indicates as the Industry Classification:Sector? Or do you make your own judgement?
I mostly put the stocks in sectors denoted by Standard & Poor, even though as LTR mentioned above, some companies such as Shaw Communications could essentially be put in another sector altogether. Then again, even though I still hold it in the portfolio, I haven't been adding new money to Shaw since they stopped increasing their dividend a few years ago.
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Re: Stock Sector Allocation

Post by shelmarcel »

Where I started with equity sector allocation was using the MSCI World Index sector weights which splits out target weightings by GIC category. Also, as a Canadian investor, I have my equity portfolio split out by thirds in Canada/US/international (EAFE+EM). Has worked well. Rounded, the category weightings are generally:
-financials 15%
-reits/property 5%
-materials 5%
-industrials 10%
-energy (incl pipelines) 7.5%
-utilities 5%
-health care 12.5%
-telecomm 5%
-technology 17.5%
-consumer staples 7.5%
-consumer discretionary 10%
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Re: Stock Sector Allocation

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Changes to the official GICS sectors are upcoming, per Wall Street's sector shakeup will let more tech stocks shine | Reuters
Reuters wrote:In a reorganization spanning three sectors, none of the so-called FANG high-growth stocks - Facebook (FB.O), Amazon.com (AMZN.O), Netflix (NFLX.O) and Google-owner Alphabet (GOOGL.O) - will be classified as technology companies, even though investors widely view them as the leaders of a tech rally that has powered the stock market higher in recent years.

On Sept. 24, S&P will shift Alphabet, Facebook, Twitter (TWTR.N), Paypal (PYPL.O) and videogame makers Electronic Arts (EA.O) and Activision Blizzard (ATVI.O) from the S&P 500 technology index to an expanded telecom group, renamed “Communications Services.”

Netflix, which like Amazon, is currently part of the consumer discretionary group, will also move to the expanded telecom group. Amazon will stay put in consumer discretionary.

The changes are part the largest-ever reorganization of the Global Industry Classification Standard, or GICS, an industry taxonomy widely used by investors. MSCI will adjust its indexes in November.

Meant to reflect the economy’s evolution, the overhaul of GICS will affect how mutual fund managers choose between stocks, and force passively managed sector funds to reallocate billions of dollars. Removing Alphabet and Facebook from technology indexes may lead investors to pay more attention to smaller, remaining technology companies.
For individual investors who use broad-based indices this probably will be a non-event but those who invest in individual stocks might need to consider whether or not to make adjustments to their investment policy statement (or equivalent).
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Re: Stock Sector Allocation

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It will also likely mean some massive shifts of stocks within certain boutique sector ETFs and some unwelcome cap gains.

Added later: Should have qualified the above to suggest some broad sector ETFs can have a surprise cap gains too from time to time, e.g. when Tim Hortons got taken out but not nearly as likely or as much as sector ETFs.
Last edited by AltaRed on 23 Aug 2018 12:33, edited 1 time in total.
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Re: Stock Sector Allocation

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Fully retired and living off CPP\OAS (being cut back) and a portion of our dividends, Over the years we've consolidated to just 4 sectors, almost evenly balanced. Hold these in 2 RRIF's, 2 TFSA, Non-Reg and DRIP accounts:
Banks
Communication
Utilities
Pipelines
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Re: Stock Sector Allocation

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cannew wrote: 23 Aug 2018 10:24 Hold these in 2 RRIF's, 2 TFSA, Non-Reg and DRIP accounts
It helps if one is using a terminology which is understood by all.

One can DRIP in a RRIF, TFSA or non-registered account. There is no special account category defined as "DRIP".

Personally, I would avoid DRIPs like the plague in a non-registered account.

Speaking of RRIF's, it makes little sense to DRIP in an account from which there are annual mandatory withdrawals.
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Re: Stock Sector Allocation

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adrian2 wrote: 23 Aug 2018 12:00 Speaking of RRIF's, it makes little sense to DRIP in an account from which there are annual mandatory withdrawals.
Think we've had that 'debate' and more with Cannew before. :wink: Could have a whole thread on that by itself.
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Re: Stock Sector Allocation

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adrian2 wrote: 23 Aug 2018 12:00
cannew wrote: 23 Aug 2018 10:24 Hold these in 2 RRIF's, 2 TFSA, Non-Reg and DRIP accounts
It helps if one is using a terminology which is understood by all.

One can DRIP in a RRIF, TFSA or non-registered account. There is no special account category defined as "DRIP".

Personally, I would avoid DRIPs like the plague in a non-registered account.

Speaking of RRIF's, it makes little sense to DRIP in an account from which there are annual mandatory withdrawals.
Our DRIP's with Computershare is where we have the dividends deposited directly to our bank without any fees. All our other accounts DRIP but they re-invested to buy more shares.
DRIP's, at least the traditional ones, are great for beginners who wish to invest small amounts with individual stocks (those which also have SPP) and not ETF's. Our grandkids each have one and they have done extremely well.
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