Presentation Template SPDR

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Presentation Template SPDR Sectors: How to Do More for the Core Marketing Communication For Investment Professional use only. Do not reproduce or reprint without the written permission of State Street Global Advisors. All the information contained in this presentation is as of date indicated unless otherwise noted. 2388197.3.1.GBL.INST 1 Table of Contents 1. The Case for Sector Investing 2. Sector Portfolio Construction Top-Down Thematic Bottom-Up/Fundamental Technical 3. Considerations for Sector Portfolio Implementation 2388197.3.1.GBL.INST 2 The Case for Sector Investing For Institutional Use Only 2388197.3.1.GBL.INST 3 Diversification: Variable Correlations Among Sectors Correlations between sectors vary markedly, potentially providing another source of diversification to an equity portfolio Sector Rolling 90-Day Pair-wise Correlation (January 2016 – December 2018) 1.1 Average Sector Pair-wise 90-Day Correlation The shaded area indicates differences among sector pair-wise correlations 0.9 0.7 0.5 0.3 0.1 +/- 1 Stdv -0.1 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Source: FactSet, as of December 31, 2018. Diversification does not ensure a profit or guarantee against loss. It is not possible to invest in an index. Sectors are represented by the corresponding S&P Select Sector Indices. 2388197.3.1.GBL.INST 4 Diversification: Variable Correlations to the Broad Market Sector correlations to the broad market are different and change over time Sector 90-Day Correlation to the S&P 500 Index ( January 2016 – December 2018) Average 1.20 Max Min 1.00 0.80 0.60 0.40 0.20 0.00 -0.20 -0.40 Utilities Telecom Real Estate Cons. Energy Health Care Financials Materials Industrials Cons. Disc. Tech Staples Source: FactSet, as of December 31, 2018. Diversification does not ensure a profit or guarantee against loss. It is not possible to invest in an index. Sectors are represented by the corresponding S&P Select Sector Indices. 2388197.3.1.GBL.INST 5 Wide Dispersion and Changing Winners and Losers Among sectors, there are wide dispersions of returns, providing investors opportunities to add value by overweighting winners and underweighting losers Sector Calendar Year Price Returns 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Cons. Disc. -17.7 59.9 28.0 14.8 26.3 41.0 26.1 8.4 23.7 36.9 4.7 Cons. Staples -24.5 45.2 25.7 10.5 21.9 38.7 24.3 5.2 20.1 21.4 0.5 Energy -31.6 38.8 23.9 10.2 16.2 37.6 23.3 4.3 17.8 21.2 -0.5 Financials -33.6 23.5 19.9 7.9 15.2 33.2 18.2 3.8 16.1 20.0 -1.6 Health Care -34.7 20.8 17.9 4.4 13.4 29.6 13.1 1.2 14.1 20.0 -5.6 Industrials -35.9 17.3 12.8 2.8 13.2 26.2 12.9 -0.7 12.2 19.4 -6.24 Tech. -38.5 17.1 12.3 1.3 12.5 22.7 11.4 -1.7 12.0 18.5 -8.0 Materials -41.5 14.8 10.8 0.8 12.5 22.7 8.1 -3.5 9.5 10.5 -11.2 Real Estate -43.7 11.3 10.7 0.0 12.2 22.3 7.5 -4.7 4.3 8.3 -14.7 Telecom -45.0 11.2 9.1 -2.9 7.5 8.8 4.7 -8.4 2.6 7.2 -15.0 Utilities -47.1 6.8 0.9 -11.6 2.3 6.5 -1.9 -10.4 0.0 -3.8 -16.4 S&P 500 -57.0 2.6 0.7 -18.4 -2.9 -1.5 -10.0 -23.6 -4.4 -6.0 -20.5 Sector Dispersion 29.4 53.1 27.2 26.5 23.9 34.5 28.1 18.8 23.6 40.7 25.2 Size & Style Dispersion 7.2 10.4 12.2 5.1 4.3 10.1 10.5 8.9 17.9 15.7 9.9 Wider dispersions among sectors than among traditional size & styles Source: FactSet, as of December 31, 2018. Past performance is not a guarantee of future results. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. Diversification does not ensure a profit or guarantee against loss. Sector dispersions are calculated using the max returns minus min returns among S&P 500 sector indices. Size & style performance is represented by the S&P 500 Value Index, S&P 500 Growth Index and S&P SmallCap 600 Index. 2388197.3.1.GBL.INST 6 For Thematic Plays, Sectors May be Better than Stocks An investor may get the sector call right, but the stock call wrong, as the odds are historically not in the stock picker's favor Percentage of S&P 500 Stocks That Outperformed or Underperformed the Sector Average by More Than 10% More stocks underperformed the sector average significantly than the ones outperforming Underperform 10% Outperform 10% 49 43 35 35 36 36 34 34 32 31 32 31 30 30 30 30 30 30 30 29 30 31 29 30 28 27 27 27 28 28 25 25 23 24 2003 - 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2018 Average Source: State Street Global Advisors, FactSet, January 2003 – December 2018. Performance quoted represents past performance, which is no guarantee of future results. The index returns are unmanaged and do not reflect the deduction of any fees or expenses. The index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. It is not possible to invest in an index. 2388197.3.1.GBL.INST 7 Sector Portfolio Construction For Institutional Use Only. 2388197.3.1.GBL.INST 8 Sector Strategy Implementation Approaches Top-Down Thematic Bottom-Up Technical • Survey macro • Position according • Evaluate sector • Overweight/ economic to changes in fundamentals, underweight environment and certain macro- such as valuations sectors based analyze business economic variables and earnings on recent cycles • Identify secular trends performance industry trends and • Position towards harness a long- sectors that show term growth trend attractive within a particular valuations and/or segment of the strong sentiment economy Source: State Street Global Advisors 2388197.3.1.GBL.INST 9 Research on Sector Performance in Business Cycles Investment Belief: Business cycles exhibit characteristics that impact sectors or industries differently Research methodology 1. Divide the economic cycle based on the direction and magnitude of changes of the Conference Board Leading Economic Indicator (LEI) Index 2. Leverage Kenneth French 48 SIC-based (Standard Industrial Classification) industry portfolios to create sector performance history back to 1961, which covers 7 recessions and recoveries, 12 expansions and 11 slowdowns 3. Assess sector performance and performance consistency 20 1 15 1 10 1 5 1 1 0 1 -5 0 -10 0 -15 LEI YoYChange (%) 0 -20 0 -25 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Recession Recovery Expansion Slowdown Conference Board LEI YoY % Source: FactSet, as of December 31, 2018. Diversification does not ensure a profit or guarantee against loss. It is not possible to invest in an index. Sectors are represented by the corresponding S&P Select Sector Indices. 2388197.3.1.GBL.INST 10 Sector Performance in Business Cycles Recession: Declining economic Avg excess return during the business cycle Market Return % of Times Outperforming outputs and aggregate demand; 5.0% 100% increasing unemployment; low 1.0% 0.0% 80% consumer expectations; easing -1.6% -5.0% -2.9% monetary policy 60% -10.0% 40% -15.0% market -20.0% -14.8% 20% Avg Return over the Cycle the over Return Avg -20.3% -25.0% -21.6% 0% % of times outperforming the the outperforming times of % Cons. Staples Utilities Health Care Industrials Tech Real Estate Top 3 Bottom 3 Recovery: Economy rebounds from Avg excess return during the business cycle Market Return % of Times Outperforming the bottom but below the trend. 50.0% 100% Consumer expectations and consumer 39.2% 40.0% 80% spending pick up. Interest rate 33.1% 29.3% remains low. 30.0% 60% 21.4% 18.0% 20.0% 40% 14.7% market 10.0% 20% Avg Cycle the over Return Avg 0.0% 0% % of times outperforming the the outperforming times of % Real Estate Cons. Disc. Materials Health Care Cons. Staples Utilities Top 3 Bottom 3 Source: State Street Global Advisors, as of November 30, 2018. Past performance is not a reliable indicator of future performance. This information should not be considered a recommendation to invest in a particular sector shown. It is not known whether the sectors shown will be profitable in the future 2388197.3.1.GBL.INST 11 Sector Performance in Business Cycles Expansion: Economic growth Average Period Return Market Return % of Times Outperforming reaches the cycle peak. Business 25.0% 100% confidence improves and business 21.0% 18.7% spending expands. Interest rate starts 20.0% 17.8% 80% increasing from a relatively low level. 15.0% 60% 10.8% 10.6% 10.0% 7.6% 40% market Return over the Cycle the over Return 5.0% 20% Avg 0.0% 0% % of times outperforming the the outperforming times of % Tech Financials Real Estate Health Care Cons. Staples Utilities Top 3 Bottom 3 Slowdown: Economic growth starts Average Period Return Market Return % of Times Outperforming decelerating but remains positive.
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