Top Sector Bets Made by Our Ultimate Stock-Pickers

Our Ultimate Stock-Pickers team is overweight financial services and consumer goods--we take a deeper look at these two top sectors

Greggory Warren, CFA 14 December, 2010 | 12:40PM

When looking at the holdings, purchases, and sales of our Ultimate Stock-Pickers each quarter, we pay close attention to the sector allocation decisions being made by our top managers, especially those instances where they happen to be overweight the market. With the performance of most stock portfolios measured against a benchmark, such as the S&P 500 Index, fund managers tend to be very cognisant of the weighting of their portfolios relative to the index. Even our top managers, who by and large are bottom-up stock pickers, will have an idea where they are overweight (or underweight) the market and by how much. That's not to say that they are actively managing their portfolios to the benchmark (which is something that some managers will do), it's just that they are aware of where they are relative to the market.

Bruce Berkowitz, for example, the manager of the Fairholme fund, is fully aware that his stock portfolio is heavily weighted in Financial Services. For much of the past year, Berkowitz has been deliberately increasing his holdings in Financial Services companies mostly at the expense of Health Care and Industrial Materials names. Significant new money purchases of American International Group, Goldman Sachs, Citigroup, Bank of America, Morgan Stanley, Regions Financial, and CIT Group over the past year exemplify the type of buying activity that has been going on in the Fairholme fund. By the end of the most recently reported period, Berkowitz had more than three quarters of the fund's stock portfolio invested in Financial Services stocks, which is a big overweight position relative to the S&P 500 Index, where Financial Services made up around 17% of the benchmark at the end of the third quarter. This is just about the biggest commitment we've seen to any one sector by a manager in a very long time.

While one could always point to Berkshire Hathaway, where Financial Services makes up 41% of the stock portfolio (and Consumer Goods accounts for another 42%), it should be remembered that aside from its $55 billion stock portfolio, the insurer held about $36 billion in fixed income securities and another $25 billion in other investments (which include equity and fixed income securities tied to investments Warren Buffett made in Goldman Sachs, General Electric, Swiss Re, and Wrigley in the months leading up to and following the collapse of the credit and equity markets in 2008). And this doesn't even include Berkshire's ownership of Burlington Northern Santa Fe, MidAmerican Energy Holdings, and a collection of more than 70 other subsidiaries operating in a wide array of industries, which collectively are worth somewhere in the neighbourhood of $80 billion. While Berkowitz does have more than one third of the Fairholme fund invested in fixed income and cashlike securities, we don't feel that he has the same degree of diversification in his holdings.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Diageo PLC2,932.50 GBX1.30

About Author

Greggory Warren, CFA  Greggory Warren, CFA, is a senior stock analyst with Morningstar.

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