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Market Commentary - September 18, 2008

Sector exposure often fluctuates dramatically during periods of market volatility and this time is no different. With the cyclical nature of sectors, industry exposure within major indices and actively managed funds often moves significantly over time. Consider for example that the energy exposure within the S&P 500 lost more than half from 1980 to 1990, only to double a decade later. More recently, technology exposure soared with the internet boom during the 90’s only to decline by more than 20% in the ensuing bust period following the year 2000. Today, we are witnessing a significant decline in the financial industry exposure as this allocation is largely fluctuating with the boom/bust cycle of the real estate/mortgage industry. In the past, these violent movements, as they are also reflected in longer term sector allocations, often reverse over time but it usually takes years and not months. Nevertheless, these shifts can create opportunities for investors to capitalize on the relatively low valuations of some sectors and their ensuing recoveries.

Sector Exposure of the S&P 500 by Decade and More Recent Periods

 

1980

1990

2000

2003

2007

Current

Energy

27.1%

13.4%

6.6%

5.8%

12.9%

13.1%

Materials

13.7%

7.2%

2.3%

3.0%

3.3%

3.5%

Industrials

5.6%

13.6%

10.6%

10.9%

11.5%

11.4%

Consumer Disc.

14.6%

12.8%

10.3%

11.3%

8.5%

8.9%

Consumer Staples

6.8%

14.0%

8.1%

11.0%

10.2%

12.3%

Healthcare

5.5%

10.4%

14.4%

13.3%

12.0%

13.0%

Financials

5.0%

7.5%

17.3%

20.7%

17.6%

15.0%

Technology

13.0%

6.3%

21.2%

17.7%

16.7%

16.0%

Telco. Services

4.5%

8.7%

5.5%

3.5%

3.6%

3.1%

Utilities

4.2%

6.2%

3.8%

2.8%

3.6%

3.6%

                                                                                                              Source: S&P 9/17/08

Active managers often use sector allocations as a way of adding excess returns to their investment portfolios. By overweighting and underweighting certain sectors versus their respective indices, active managers strive to outperform over both longer and shorter-term periods. Given the recent volatility in the financial sector, this can create opportunities for some managers to reconsider their current allocation and perhaps redeploy assets from “overvalued” areas to those that are perceived “undervalued”. In this way, active managers can not only improve “risk-adjusted” returns but also “absolute” returns. Passive managers or index managers, on the other hand, are required to track their indices closely and are not afforded this opportunity. Instead, index managers must follow sectors closely regardless of the valuations. As a result, volatile periods, such as the one we are witnessing today, can clearly create sector opportunities for active managers but passive managers must simply follow sector direction.
 

Prepared by:

Robert J. Garland, MBA, Vice President Research
Research Department/ING Advisors Network

The views are those of Robert Garland, Vice President, Research Department, ING Advisors Network, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance.

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