The Case For Active — U.S. Industry Exposures (Part 1)

November 2023

Over the course of a cycle, industries will outperform or underperform the general market. The chart below illustrates this point very well, as it pertains to the U.S. investment grade index. The thick black line traversing each column denotes where index returns fall. Industries whose relative performance to the index is above (below) the index are shown above (below) the black line.

The U.S. Bank sector is a large, well held, sometimes over owned, industry. Over the past three years it has underperformed the broad index. In 2021, the sector did not keep pace with the market risk rally. In 2022, excessive issuance and recession fears negatively impacted valuations. In 2023, regional banks worries hampered returns. In fact, you will note that in six of the past eight years, U.S. Banks have underperformed the broader market.

Source: J.P. Morgan. The figures above are out/underperformance as per Excess returns versus the overall JULI index. All figures are ex-EM. Below the dashed line are the underperforming sectors act year.

How should we think about this?

We believe that the largest participants within the U.S. Banking sector are fundamentally sound and will weather a reasonable downturn. We own large U.S. Banks. However, we will alter our weights, often reducing exposures ahead of supply, or simply selling securities deemed to expensive relative to other opportunities.

Unlike a passive index, we can diversify holdings away from large sectors like U.S. Banks and into areas that have a greater likelihood to outperform.

Investors should be aware that the opportunity to outperform is likely to change year after year, which suits active management best.