Sector rotation is one way we attempt to add value in client portfolios. We rotate within both the equity and fixed income allocations, as we continue to look for good values across asset markets. Currently our equity portfolios have employed a barbell, with cyclical overweight positions in the Energy and Technology sectors, as well as defensive overweight positions in Health Care and Consumer Staples.
For many months the broad Health Care sector has not done well when compared to the broad market, even though many of the industries we own have done quite well (such as Managed Care and Medical Devices). Within the sector, the main industry laggard in Health Care over the last year or so has been the ultra defensive Pharmaceuticals group, which we’ve owned along with the higher flying industries mentioned above. Pharmaceuticals companies are very cheap, have pricing power, and just recently may be showing some signs of turning the corner. In fact, though they are considered a low beta play, it’s interesting that Pharmaceuticals have actually been outperforming the broad market during this rally off the March lows. After a very nasty underperformance period, perhaps Pharmaceuticals are about to look a whole lot healthier.