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Equity Sector Weightings – Review and Rebalance

When building an equity portfolio, we recommend investing in quality companies, maintaining proper diversification, and holding for the long term. Past experience and several studies have taught us that the majority of long-term investment performance is derived from asset allocation, or the mix of investments in a portfolio. It is important to own investments in various asset classes. It is also important to own a mix of investments within these asset classes, such as laddering across bond maturities and investing across the various equity sectors in the appropriate amounts. 

Incorporating analyst input 

Equity Research sector teams look for deviations in performance, assess sector valuations, and incorporate their long-term outlook for each sector to help determine the most appropriate sector weighting to recommend. While we target weightings that are close to their respective historical averages, we assess variables that would justify a higher or lower weight in the future. 

Investment Policy Committee changes 

The Investment Policy Committee (IPC) announced changes to the equity sector weighting recommendations for Canada late last year. We review our recommendations on a quarterly basis, which includes an evaluation of sector performance, sector valuation, and the market cycle, among other factors. In turn, we encourage investors to conduct frequent reviews of their portfolios, as well, and make the proper adjustments when necessary. 

Leading factors to our recent changes included: 

  • Energy Sector Headwinds – In the 12 months leading up to our recommended change, the energy sector significantly underperformed the TSX. In our view, the challenges faced by the energy sector are long term in nature. However, we continue to believe an allocation to the energy sector within a well-diversified portfolio is important, and we see opportunity in our buy-rated energy stocks. 
  • Market Outlook – Given our view on the stage of the market cycle and the opportunities we see in the market, we have made some other small changes. Overall, we recommend a slight overweight to more defensive sectors.

Source: Edward Jones Investment Policy Committee

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