The Case For Active — U.S. Industry Exposures (Part 2)

December 2023

The performance of each industry can vary materially versus the general market year-over-year. In our prior note, we highlighted the underperformance of the U.S. Bank sector over the past eight years. In this comment, we focus on how many corporate sectors oscillate between outperforming and underperforming the general benchmark.

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 the broader index returns. Industries whose relative performance was greater (less) than the general index are shown above (below) the black line.

Over the past eight years, it is common to see the fortunes of a sector change materially in the next year. Industries that declined from material outperformer to material underperformer in one year, including REITS 2018/19, Telecom 2019/20 and REITS 2021/22 are highlighted in red. Conversely, industries that rose from material underperformer to material outperformer in one year, including Energy in 2020/21, Technology in 2021/22 and Media/Entertainment in 2022/23, are highlighted in green.

Source: J.P. Morgan. The above figures 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 each year.

One way we add value

An important part of our process is to assess the future prospects of underperforming companies. We will utilize our fundamentally driven credit process to assess firms currently positioned in underperforming sectors to select those with solid credit and long-term return prospects. In fact, some of our best investments have come from selling the current year’s ‘winners’ to buy the ‘losers’.

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