Saturday, June 16, 2001

Savvy Strategies

Rotate funds among sectors

        Problem: I don't want to lose money when whole industries weaken because market and economic cycles change.

        Strategy: Consider sector rotation to avoid overload in any one industry.

        Ed Arbaugh, senior vice president and chief investment officer for PNC Advisors in Ohio, says to think first of industries as divided into three broad sectors: cyclical, defensive and growth.

        Cyclical industries, such as housing, automobiles and durable goods — such as refrigerators and laundry equipment — are closely tied to consumer demand, which in turn is tied to the health of the economy. These industries tend to perform well when we are emerging from a recession.

        Defensive industries, such as food, drugs, tobacco and health care, generally are steady performers in any economic cycle because demand remains stable. Utilities also can be considered defensive, because they borrow a lot in low-interest rate times, which helps to reduce their costs and increase profits. They also perform well in good times, when demand for energy is high.

        Growth industries, marked by rapid expansion, seem to perform well in any business cycle. The communications and entertainment industries — and until last year, the technology industry — appeared immune to economic cycles. Recent history, however, warns against predicting the direction of any industry with certainty.

        For sector rotation to work, assets must be positioned before the sector starts to rise, and this involves some complex economic forecasting. A less complicated approach would be to ensure your portfolio is consistently diversified, requiring only a change in the weighting as necessary.

        Another approach is to select a mix of mutual funds that focus on different sectors.

        Readers: Consider Savvy Strategies as general information only and seek the help of professionals because circumstances might vary.

        Planners: Share your unique strategies with Enquirer readers. Send your Savvy Strategies to Amy Higgins, 312 Elm St., Cincinnati 45202 or e-mail


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