Research.LeutholdGroup

The portfolio is positioned with a slightly pro-cyclical stance, but also owns defensive and growth-oriented groups that are deemed attractive by the Group Selection (GS) Scores.

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Due to a falloff in our sector rankings, exposure to IT in our equity portfolio has dropped sharply over the past year. Elevated valuations, combined with poor relative strength, overbought signals, and slowing growth are the primary impetus for the declining scores.

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While the IT sector and its group constituents have fallen from the upper echelons of the GS Scores, the  majority of the underlying industries sit in the middle range (Neutral) of the ratings. This isn’t a negative call toward the IT sector, but a shift away from the high-conviction outlook we previously held. 

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Financials is now the top sector weight in our Select Industries portfolio, with impressive valuations, growth, and relative strength driving industries within the sector up the ranks of the Group Selection (GS) Scores.

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The portfolio trimmed exposure to Information Technology in July, with the Financials sector being the main beneficiary of the sales proceeds. 

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The portfolio continues to maintain exposure to growth, cyclicals, and defensives, with a slight preference for rising interest rates and positive performance. 

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While we have lightened Info Tech holdings, the portfolio continues to be positioned with exposure to both the big growers and economically sensitive cyclicals.

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After accumulating and maintaining heavy exposure to Information Technology since early 2023, Select Industries trimmed the weight in the sector by selling Internet Services & Infrastructure. 

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In a market that is less than ideal for an all-cap strategy, Select Industries has had success by investing in several key themes: mega-cap growth, housing/construction, and IT supply-chain beneficiaries. 

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Select Industries looks much different than it did one year ago, with exposure to growth-oriented groups increasing, while commodity- and defensive holdings have been declining. This shift benefited performance throughout the last twelve months. 

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Select Industries has been successful at finding leading industry groups outside the handful of stocks driving the S&P 500 over the last year. Homebuilding, Semiconductor Equipment, and Trading Companies & Distributors have all been key contributors to the strategy.

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At the start of a new year, we look back at the sector shifts that transpired throughout 2023—mainly going from commodity and defensives to start 2023—to growth and cyclicals as we begin 2024.

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Over the entire history of this study, the momentum plays of our “Dreams” and “Nightmares” have worked both ways. This was not the case in 2023, however, as the fortunes for both groups (based on 2022 performance) U-turned in a considerable way.

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The portfolio is allocated among various style categories—maintaining diversification—yet still taking concentrated positions in our favorite industry groups.

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Health Care Equipment and Health Care Supplies were both downgraded to Unattractive this month.  Weight-loss drugs have generated most of the negative headlines in the space, but we’ve also observed slow and steady deterioration in top- and bottom-line growth. 

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Oil & Gas Equipment & Services was purchased for the Select Industries portfolio last month, re-establishing exposure to what was our largest overweight entering 2023. The sector leapt from #11 to #4 in the ranks on the back of improved sentiment and macro readings. 

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The GS Scores help Leuthold Select Industries portfolio identify underappreciated themes that can turn into multi-year holdings. Managed Health Care has been a holding for over 13 years, while Semiconductor Equipment (seven years), and Homebuilding (six years) have also been long-term winning positions.

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The portfolio takes a very active approach within sectors, with almost half of its Consumer Discretionary weight allocated to Homebuilding, while completely avoiding Chemicals within the overweight Materials sector. 

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The Group Selection Scores have performed well in the first half of 2023, not an easy feat considering the abrupt style reversal that took place in January. Value and technical indicators are struggling, but the rest of the model is more than picking up the slack.

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Exposure to commodities (and defense) has fallen rapidly within Select Industries. The primary beneficiaries of that reduction are growth-oriented groups.

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