The Most and Least Loved Sectors

Technology is hot, utilities are not

Alanna Petroff 20 March, 2012 | 2:05PM
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Technology is the most popular investment sector right now, according to the latest global survey of professional money managers by BofA Merrill Lynch.

Hot on the heels of Apple (AAPL) announcing it would begin paying a dividend for the first time since 1995, the monthly BofA Merrill Lynch Global Research report reveals that fund managers around the world are piling into tech stocks. Specifically in the US, Europe and the UK, technology is the most popular sector.

"A net 33% of eurozone investors are overweight technology, up from a net 10% in February. The sector has overtaken automotives/parts to become the region's most popular," says the report.

But with all the attention and money flowing into technology, is the sector as a whole becoming too frothy? Gary Baker, head of European equity strategy at BofA Merrill Lynch Global Research says he does not have a strong view about whether tech is overbought. However, he notes that as Apple continues grabbing headlines, the world’s largest company by market capitalisation is driving public attention towards the technology sector as a whole.

While investing in Apple can be tempting, especially now that it’s offering a dividend, Morningstar analyst Michael Holt values the company slightly below the current market value, indicating that now is not necessarily an ideal time to buy.

In his latest research report, Holt writes: “We view this [dividend and share buyback] move as a positive for Apple, but our fair value estimate does not change as this simply represents a partial distribution of the $98 billion in cash and investments that we were already accounting for in our fair value estimate. This move is a positive, however, because it lowers the risk that Apple will pursue aggressive acquisitions or other riskier uses of cash.”

Currently, other UK-based technology companies that are gaining attention for capitalising on the booming smartphone and tablet market are ARM Holdings (ARM) and Imagination Technologies (IMG). However, Morningstar analysts believe these companies are currently trading above their fair market value.

On the other end of the spectrum, the least loved sector globally is the utilities sector, according to the latest fund manager survey. Banks, insurance and telecoms are also remarkably unpopular.

Specifically within the UK, the report shows a wide range of sectors have fallen out of favour, including construction, real estate, retail, utilities, financial services and telecoms.

Utilities are widely considered to have a broken business model so people are avoiding this sector, says Baker. Dividend cuts amongst utilities companies have also contributed to the sector falling out of favour with professional money managers, he says.

Yet even though utilities and telecoms are now widely shunned by money managers around the world, pharma companies have become rather popular, according to the survey. Pharma is the third most popular investment sector after technology and energy, according to the report.

It may seem odd that pharma has become so hot while utilities and telecom have been avoided, since all three sectors are generally considered to be defensive, safe options for investors during tough times. But right now, pharma is seen as the most desireable option since it still offers decent yields, says Baker. Investments in the sector have come despite the difficulties pharma companies are facing with expiring drug patents, he says.

The money manager survey by BofA Merrill Lynch compiled responses from 278 institutional investors who manage nearly $800 billion in combined assets. The survey was conducted between March 9 to 15, 2012.

Results from the previous BofA Merrill Lynch survey from February can be found here.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.