The Virtue of Active Management
Chart of the Week for September 15-21, 2000
How can the sectors of the market have two sets of returns?
The chart above shows year-to-date returns for each sector of the U.S. equity market using two different calculation methods. For example, the return for the energy sector is 12.9% using the capitalization-weighted method. (Cap-weighted return is the sum of the weight of each stock in a sector, based on the market cap size, times the return of each stock.) This method gives greater emphasis to the larger companies in the group and is the method used by most major indexes, including the S&P 500 Index.
However, as the chart also shows, the energy sector’s return is 32.9% when calculated on an equal-weighted basis. (Equal-weighted return is the simple sum of the returns of each stock divided by the number of stocks in the sector.) This method does not over-emphasize the returns of the bigger companies in the group and is a better indication of the returns available throughout the sector.
Opportunities exist in every sector and they vary with market conditions. The objective of active management is to uncover the opportunities that lie below the typical market data that we see and add value to diversified portfolios.
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