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M*: What Your Portfolio's Sector Positioning Is Trying to Tell You
This article covers M*'s new sector classification for Mutual Funds:
Some new sectors (such as Real Estate) is added and some others folded together (Software/Hardware) and all sub-sectors are now in 3 NEW super-sectors: cyclical, sensitive, defensive
Hi Investor. I really do not much care what M* does with their sector and class decisions. We find that, especially with classes, M* looks at some funds very differently than we do. Not that there is any one right way to analyze these things, but they can be quite different. One attraction to some of the sector changes is that real estate is now not lumped in with financials. We will probably find some other positives (and negatives, too). My advice is to not get hung up on M* classifications, since they can change, and if you make your buy/hold/sell decisions on these, you could end up selling a fund that should be held, or never buying a fund because of some classification quirk.
BoB, I do not find much value on the M* star ratings. Neither give much weight to mutual fund analyst opinions. However, the rest of the information is quantative so is not subject to opinion. You may object to the presentation but the data speaks for itself.
Sector weighting is data that speaks for itself. We can argue though if the presentation is a good breakdown and useful for investors. For example, while I am glad to see the break-out of real estate, I do not like Business Services and Consumer goods combined to Consumer Defensive.
Just 'cuz I'm in a cantankerous mood due to finishing my income taxes:
> Sector weighting is data that speaks for itself
That's a highly debatable proposition.
Data do not speak for or against anything. It is the observer's SELECTION and INTERPRETATION of data that speak for or against a given proposition or set of propositions. So even the decision to assign a company to a given sector is an editorial judgment that reflects the biases of the individual(s) making that judgment.
Obvious example: M* slots Berkshire Hathaway into the Financial sector, even though the majority of BRK's holdings are in consumer cyclical, healthcare, and industrial goods and services, and--at least based on BRK's recent filings--a strong, if not compelling case, could be made that BRK belongs in the "consumer cyclical," rather than "financial" sector. So, at the very least, assigning the entire value of fund's BRK holdings to a single sector rather than parsing its value out among the various sectors in which BRK is invested (or, better yet, dropping it into M*'s "miscellaneous" sector) has the potential to (and in some cases, does) massively skew the snapshot of the fund's sector distribution.
So the sector weighting isn't data that speaks for itself (no matter how much M* want you to think it is); it's M*'s subjective--and sometimes overly simplistic--presentation of the data.
It looks like you are a bit pissed of from taxes today. At least thanks for letting me know.
I'll try to reason a bit in favor of my original argument. I'm not sure if I'll be able to convince you but you are welcome to disagree with me and use whatever serves you best.
My comments were purely for opinion piece by M* like Mutual Fund Analyst commentary vs collected data presented on the site with some simple pre-processing. In the case of sector assignment to individual holdings, there is pretty much a standard industry classification by several sources. In the case of BRK, they all assign it to either Finance or Insurance businesses. Many mutual funds themselves will do the same. M* is simply tallying the results. As far as the production of these results from than, there is not really any opinion involved. It's is computerized, formatted and presented.
I would have liked the sector data presented in different ways but hey, for what I am paying ($0) that is pretty good. That data speaks itself to me. Maybe not to you!
But, do you have a point regarding the conglomerates. GE does have involvement is several industries but several of its businesses are more dominant than others. In the case of BRK, I agree with the classification that BRK's earnings is dominated by Financials. But that might not be really important in a portfolio level unless the portfolio is really concentrated (Sequoia?)
Secondly, Most companies are not like this. There is a dominant theme.
Finally, the side sector involvement of companies might cancel each other in a relatively big portfolio (say 50+ stocks) The side businesses of companies become noise that gets pretty much distributed. At 5% or less ownership it is not a huge deal.
To me M* is doing a good job. To put the data reported by M* on the same level as clearly opinion pieces is incorrect.
Even your own mutual fund self reported industry classification has to put companies in some place. I am generally fine with the values reported for my purpose and for my purposes it works. If you find a different source that distributes the companies sector participation into several sectors and add up to make the mutual fund sector score let me know. We would look and compare that with that of M*.
Comments
Sector weighting is data that speaks for itself. We can argue though if the presentation is a good breakdown and useful for investors. For example, while I am glad to see the break-out of real estate, I do not like Business Services and Consumer goods combined to Consumer Defensive.
> Sector weighting is data that speaks for itself
That's a highly debatable proposition.
Data do not speak for or against anything. It is the observer's SELECTION and INTERPRETATION of data that speak for or against a given proposition or set of propositions. So even the decision to assign a company to a given sector is an editorial judgment that reflects the biases of the individual(s) making that judgment.
Obvious example: M* slots Berkshire Hathaway into the Financial sector, even though the majority of BRK's holdings are in consumer cyclical, healthcare, and industrial goods and services, and--at least based on BRK's recent filings--a strong, if not compelling case, could be made that BRK belongs in the "consumer cyclical," rather than "financial" sector. So, at the very least, assigning the entire value of fund's BRK holdings to a single sector rather than parsing its value out among the various sectors in which BRK is invested (or, better yet, dropping it into M*'s "miscellaneous" sector) has the potential to (and in some cases, does) massively skew the snapshot of the fund's sector distribution.
So the sector weighting isn't data that speaks for itself (no matter how much M* want you to think it is); it's M*'s subjective--and sometimes overly simplistic--presentation of the data.
I'll try to reason a bit in favor of my original argument. I'm not sure if I'll be able to convince you but you are welcome to disagree with me and use whatever serves you best.
My comments were purely for opinion piece by M* like Mutual Fund Analyst commentary vs collected data presented on the site with some simple pre-processing. In the case of sector assignment to individual holdings, there is pretty much a standard industry classification by several sources. In the case of BRK, they all assign it to either Finance or Insurance businesses. Many mutual funds themselves will do the same. M* is simply tallying the results. As far as the production of these results from than, there is not really any opinion involved. It's is computerized, formatted and presented.
I would have liked the sector data presented in different ways but hey, for what I am paying ($0) that is pretty good. That data speaks itself to me. Maybe not to you!
But, do you have a point regarding the conglomerates. GE does have involvement is several industries but several of its businesses are more dominant than others. In the case of BRK, I agree with the classification that BRK's earnings is dominated by Financials. But that might not be really important in a portfolio level unless the portfolio is really concentrated (Sequoia?)
Secondly, Most companies are not like this. There is a dominant theme.
Finally, the side sector involvement of companies might cancel each other in a relatively big portfolio (say 50+ stocks) The side businesses of companies become noise that gets pretty much distributed. At 5% or less ownership it is not a huge deal.
To me M* is doing a good job. To put the data reported by M* on the same level as clearly opinion pieces is incorrect.
Even your own mutual fund self reported industry classification has to put companies in some place. I am generally fine with the values reported for my purpose and for my purposes it works. If you find a different source that distributes the companies sector participation into several sectors and add up to make the mutual fund sector score let me know. We would look and compare that with that of M*.