Ruth
Saldanha:
Many
investors
focus
on
diversifying
their
holdings
by
style,
such
as
value
or
growth,
or
by
market
capitalisation,
including
both
large
cap
stocks
and
smaller
cap
stocks.
But
investors
should
also
keep
in
mind
the
importance
of
economic
sectors
as
they
are
building
their
portfolios.
Dan
Lefkovitz
is
a
strategist
with
Morningstar
Indexes,
and
he
is
here
today
to
share
some
insights
on
sector
considerations.
Dan,
thank
you
so
much
for
being
here
today.
Dan
Lefkovitz:
Great
to
be
with
you,
Ruth.
RS:
So,
your
research
has
found
that
globally,
sector
allocations
have
had
a
significant
return
on
portfolios.
Can
you
tell
us
a
little
bit
more
about
what
you
found
from
a
global
perspective?
DL:
Yeah,
economic
sector
can
really
be
a
massive
driver
of
portfolio
returns.
We
often
see
huge
disparities
in
the
performance
of
different
sectors
of
the
equity
market,
2023
being
really
a
case
in
point.
So,
if
we
look
at
our
11
global
equity
sector
indexes,
the
best
performer
in
2023
by
far
was
technology.
It
was
up
53%.
The
worst
performer
was
utilities,
which
gained
just
1%.
So,
if
you
had
too
little
technology
exposure
in
your
portfolio,
you
underperformed.
If
you
were
heavy
on
utilities,
you
likely
underperformed
as
well.
RS:
So,
let’s
talk
a
little
bit
more
about
technology.
In
2023,
tech
was
one
of
the
best-performing
sectors
and
actually
not
just
in
2023,
but
almost
for
a
decade
before
that
as
well.
Tell
us
a
little
bit
more
about
technology
and
where
it’s
placed
today.
DL:
Yeah,
you’re
absolutely
right.
Technology
has
been
by
far
the
dominant
economic
sector
of
the
global
equity
market
for
years
now,
going
back
10,
even
15
years.
And
if
you
think
about
some
of
the
dominant
trends,
not
just
in
investing,
but
just
in
society
and
in
business,
things
like
e-commerce
and
mobile
computing,
the
cloud,
now
we
have
artificial
intelligence,
cybersecurity
is
another
one,
these
have
really
been
the
dominant
themes
and
investment
markets.
And
some
of
the
big
beneficiaries
of
these
themes
are
some
of
the
largest
companies
now
in
the
world.
So,
in
the
US,
of
course,
we
have
Microsoft
(MSFT)
and
Apple
(AAPL)
and
NVIDIA
(NVDA)
that
are
now
worth
over
a
trillion
dollars
in
market
value.
Taiwan
Semiconductor
(TSM)
has
become
the
largest
public
company
outside
of
the
US
In
Europe,
we
have
ASML
(ASML),
which
is
also
involved
in
semiconductor
manufacturing,
one
of
the
largest
public
companies
in
Canada.
You
have
Shopify
(SHOP).
So,
all
of
these
companies
have
benefited
from
tech
trends.
In
terms
of
implications,
if
you’ve
been
underexposed
to
technologies
I’ve
mentioned,
that’s
been
a
big
disadvantage
to
your
portfolio.
Canadian
investors,
the
Canadian
equity
market
being
light
on
technology
–
our
Morningstar
Canada
Index
has
only
9%
in
technology
stocks.
So,
if
you
are
a
Canadian
investor
with
significant
home
country
bias,
if
you’re
heavy
to
Canadian
equities,
you’ve
likely
missed
out
on
some
of
the
phenomenal
gains
from
the
global
technology
sector.
Now
our
Morningstar
Canada
Index
has
18%
in
energy
stocks.
So,
double
the
level
of
technology.
Energy
was
one
of
the
worst
performers
in
2023.
It
had
a
good
2022
after
the
Russia
invasion
of
Ukraine
sent
oil
prices
through
the
roof.
But
looking
back
over
the
past
10,
15
years,
energy
has
been
an
underperformer
in
the
global
equity
market.
And
I
think
that
these
sort
of
sector
dynamics
help
explain
why
the
Canadian
equity
market
has
underperformed
the
US
market
and
global
equities
over
the
past
10,
15
years.
RS:
Let’s
talk
about
the
US
market
a
little
bit
more.
Your
research
has
found
that
the
US
market
has
sector
risk.
Can
you
tell
us
a
little
bit
more
about
that?
DL:
Yeah.
Well,
as
an
American
looking
at
the
Canadian
equity
market,
I’ve
always
sort
of
thought
it
was
a
fairly
lopsided
market
with
a
lot
of
exposure
to
a
few
economic
sectors.
Energy,
as
I
mentioned,
18%.
We
have
financial
services,
the
big
banks,
33%.
Basic
materials,
another
big
weight.
But
now
when
I
look
at
the
US
equity
market,
I
also
think
it
has
significant
exposure
to
just
a
few
sectors,
technology
foremost
among
them.
So,
if
you
look
at
our
Morningstar
US
Market
Index,
which
is
a
broad
gauge
of
the
US
equity
market,
it’s
about
30%
technology
stocks
now,
which
is
really
incredible.
It
surpassed
the
level
it
hit
in
2021,
which
is
a
big
year
for
technology.
It’s
now
the
highest
it’s
been
since
2000,
before
the
bursting
of
the
dotcom
bubble.
And
it’s
important
to
remember
that
when
we
talk
about
the
technology
sector,
that’s
not
even
including
some
companies
like
Meta
Platforms,
former
Facebook;
Alphabet,
the
parent
company
to
Google,
those
are
actually
classified
in
the
communication
services
sector
now
that
you’ve
got
Amazon.com
and
Tesla,
which
are
in
the
consumer
cyclicals
sector.
So,
there
is
a
lot
of
exposure
in
the
US
market
to
technology
stocks
and
then
sort
of
techie,
kind
of
tech
adjacent
stocks.
Yeah,
I
think
sector
is
a
big
risk
factor
that
investors
should
be
paying
attention
to.
If
you’re
heavy
on
US
equities,
you’ve
got
a
lot
of
exposure
to
technology.
If
you
have
a
growth
bias
to
your
portfolio,
you’ve
probably
got
even
more
exposure
to
technology,
less
so
if
you’re
heavy
on
dividend
paying
stocks
or
small
caps
or
equities
outside
of
the
US.
RS:
That
makes
sense.
If
an
investor
wants
to
play
a
different
sector
story
or
if
they
want
to
get
out
of
technology
or
into
something
else,
what
are
some
of
the
options
in
order
to
play
various
sectors
right
now?
DL:
Yeah,
there
are
different
ways
that
investors
allocate
between
sectors.
There’s
something
called
the
sector
rotation
strategy.
It’s
been
around
for
a
long
time.
The
idea
is
to
align
your
sector
allocation
with
the
business
cycle.
So,
when
the
economy
is
doing
very
well,
you
want
to
be
in
sectors
with
a
lot
of
economic
sensitivity,
maybe
financial
services
or
consumer
discretionary
companies.
If
the
economy
is
in
a
trough,
in
a
downturn,
you’d
want
to
be
in
defensive
areas
like
maybe
healthcare,
utilities,
consumer
staples.
I
think
it’s
hard
to
get
that
sort
of
thing
right.
We
saw
in
2023
a
lot
of
economists
were
predicting
hard
landing
or
soft
landing
for
the
US
economy.
It
didn’t
land
at
all.
So,
it’s
a
little
hard
to
know
where
the
business
cycle
is.
Valuation
is
another
way
to
allocate
across
sectors.
It’s
a
longer-term
oriented
strategy.
It
doesn’t
always
pay
off
immediately.
But
at
Morningstar,
we
have
our
equity
research
team
that
are
assigning
fair
value
estimates
to
1,500
companies
across
the
world,
across
economic
sector.
So,
you
can
take
those
fair
value
estimates,
compare
them
to
share
prices,
and
aggregate
them
to
the
sector
level
to
get
a
view
of
where
valuations
are
on
a
sector
basis,
so
which
sectors
of
the
equity
market
are
overvalued
or
undervalued.
RS:
So
finally,
as
we
stand
today,
from
your
perspective,
what
are
some
of
the
biggest
risks
and
the
biggest
opportunities
for
investors
from
a
sector
perspective?
DL:
Yeah.
Well,
I’m
going
to
rely
on
the
valuation
estimates
of
Morningstar’s
equity
research
team.
And
you
won’t
be
surprised
to
hear
me
say
that
technology
is
a
sector
that
we
think
looks
a
little
bit
rich,
looks
a
little
bit
overvalued.
Not
that
there
aren’t
still,
at
the
company
level,
certain
stocks
that
are
attractively
valued,
but
in
the
aggregate,
we
think
the
technology
sector
now
is
looking
rich,
looking
overvalued
after
its
huge
run
up
in
2023
and
of
course,
the
outperformance
that
we
saw
for
over
a
decade
prior.
Other
sectors
of
the
market
are
looking
a
lot
more
attractive.
Healthcare
is
one
–
and
I’m
talking
globally
here
–
healthcare
is
a
sector
that
is
not
very
heavily
represented
in
the
Canadian
equity
market.
So
Canadian
investors
might
want
to
have
global
healthcare
exposure
here
to
take
advantage
of
attractive
valuations
and
a
lot
of
great
companies.
A
better
story
for
Canadian
equity
investors
is
that
the
energy
sector
is
looking
attractively
valued
to
us.
Now,
again,
that’s
not
necessarily
a
view
for
2024,
but
over
the
long
term,
we
think
that
there
are
a
number
of
sectors
that
look
attractively
valued
that
have
upside
potential.
RS:
Thank
you
so
much
for
joining
us
today,
Dan.
DL:
Thanks
for
having
me,
Ruth.
RS:
For
Morningstar,
I’m
Ruth
Saldanha.
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