Wellington and Wellesley hold zero stocks in the "materials" sector?

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nisiprius
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Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by nisiprius » Mon Jun 29, 2020 12:20 pm

I just noticed that Wellington hold stocks in ten of the eleven GICS sectors, but nothing at all in "Materials." Exactly the same thing is true of Wellesley.

Nothing scandalous here, particularly since materials are only 2.5% of the S&P 500, but it does seem odd. 0.00% seems like a point of principle. Thoughts?

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by 123 » Mon Jun 29, 2020 12:23 pm

Therea are S&P 500 funds for those that want everything in the S&P 500.

It could also be due to a classifcation variance.
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02nz
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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by 02nz » Mon Jun 29, 2020 12:24 pm

My guess is that it's not a matter of "principle," rather just that they don't hold that many stocks (Wellington 62, Wellesley 67), and so they happen not to own a single company that gets classified under materials. If you picked 67 companies at random (not saying that's their methodology, of course) it's quite possible you end up with 0 in materials.

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by cheezit » Mon Jun 29, 2020 1:28 pm

02nz wrote:
Mon Jun 29, 2020 12:24 pm
My guess is that it's not a matter of "principle," rather just that they don't hold that many stocks (Wellington 62, Wellesley 67), and so they happen not to own a single company that gets classified under materials. If you picked 67 companies at random (not saying that's their methodology, of course) it's quite possible you end up with 0 in materials.
I agree. There are a total of 28 companies in the S&P 500 that are in the materials sector (out of the 505 total stocks in the index), so a random selection of 67 companies would have about 3 stocks in the Materials sector. Not hard to go from 3 to 0 by happenstance.

That being said, the sector as a whole also has a trailing P/E ratio of about 34 (compared to the overall index's 21.something), so it's not hard to see the historical LCV tilt of Wellington and Wellesley preventing the last couple from sneaking in.

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by tvubpwcisla » Mon Jun 29, 2020 1:31 pm

So that is why they perform so well!

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by willthrill81 » Mon Jun 29, 2020 2:14 pm

cheezit wrote:
Mon Jun 29, 2020 1:28 pm
02nz wrote:
Mon Jun 29, 2020 12:24 pm
My guess is that it's not a matter of "principle," rather just that they don't hold that many stocks (Wellington 62, Wellesley 67), and so they happen not to own a single company that gets classified under materials. If you picked 67 companies at random (not saying that's their methodology, of course) it's quite possible you end up with 0 in materials.
I agree. There are a total of 28 companies in the S&P 500 that are in the materials sector (out of the 505 total stocks in the index), so a random selection of 67 companies would have about 3 stocks in the Materials sector. Not hard to go from 3 to 0 by happenstance.

That being said, the sector as a whole also has a trailing P/E ratio of about 34 (compared to the overall index's 21.something), so it's not hard to see the historical LCV tilt of Wellington and Wellesley preventing the last couple from sneaking in.
I too agree that this is the most likely explanation. It seems doubtful that management consciously decided to entirely avoid the materials sector.
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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by tealeaves » Mon Jun 29, 2020 9:17 pm

A bit odd but not too "material"

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by JBTX » Tue Jun 30, 2020 2:29 am

I find the allocation of Wellington vs Wellesley more interesting. I always assumed their equity was the same and just differed in bond allocation.

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by theorist » Tue Jun 30, 2020 6:52 am

JBTX wrote:
Tue Jun 30, 2020 2:29 am
I find the allocation of Wellington vs Wellesley more interesting. I always assumed their equity was the same and just differed in bond allocation.
It does seem like Wellington is making definite strides towards growth instead of value, while Wellesley is sticking with value.

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by wriley4409 » Tue Jun 30, 2020 9:06 am

Both Wellington and Wellesley are actively managed funds. Not only do they differ from the S&P 500 in their sector makeup, they only include very large cap stocks. (close to mega cap).

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by JamesDean44 » Tue Jun 30, 2020 12:35 pm

tealeaves wrote:
Mon Jun 29, 2020 9:17 pm
A bit odd but not too "material"
:sharebeer

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by hayesfj » Thu Jul 02, 2020 7:45 am

I was bothered by the comments that this was probably random given that there were only 28 Materials Sector Stocks out of the 505 in the S&P 500, so I took a look at the math. I did have to dig out a stat book, so there is always the chance I am wrong.

As a simplified example, the math is the same as a jar with 2 red marble and 18 black marbles. What are the chances of picking three marbles at random without replacement and not getting a red marble?

(18 x 17 x 16) / (20 x 19 x 18) = 4,896 / 6840 = 0.7158 = 71.58%

The math is a little more tedious when there are 28 Material Sector stocks (red marbles) and 477 all other Sectors (black marbles) out of the 505 in the S&P 500 jar, and you are picking a random selection of 67 (Wesley) stocks or 62 (Wellington) stocks not containing any of the Material Sector stocks. I get a ~1.6% chance for Wesley and a 2.3% chance for Wellington. The chance that when using a random selection neither contains a Materials Sector stock would be the multiplication of the two or 1.6% x 2.3% = 0.0368%

I can not say why neither of the funds contain Material stocks, but I can state that the chance of it being a random event is highly unlikely.

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Re: Wellington and Wellesley hold zero stocks in the "materials" sector?

Post by Valuethinker » Thu Jul 02, 2020 8:14 am

nisiprius wrote:
Mon Jun 29, 2020 12:20 pm
I just noticed that Wellington hold stocks in ten of the eleven GICS sectors, but nothing at all in "Materials." Exactly the same thing is true of Wellesley.

Nothing scandalous here, particularly since materials are only 2.5% of the S&P 500, but it does seem odd. 0.00% seems like a point of principle. Thoughts?

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It has been a long time since I looked at US materials stocks. Not sure what is in that sub index?

If they are negative on pricing power of primary producers they will be out of materials. These companies don't make their money on volume, they make it in the (usually brief) periods when they have pricing power.

So I suspect it's a consequence of macro view.

I think it's a fair bet that, globally, producers have too much capacity and not enough demand. They invested for the Chinese post 2008 boom to continue - quantitatively the largest government spending boom in history (at least in peacetime) - and inevitably that boom has now receded. You can't keep pouring concrete and building High Speed Rail forever*.

In contrast to what others say I don't imagine these stocks are "expensive". It's not a high P, it's that the divisor, the Earnings Per Share, that is collapsing, thus giving a high PE. If you follow Peter Lynch, you buy these things at times like these (when it all looks really bleak, and investment is slashed, thus setting the stage for the next upturn) and sell them when the PEs are low (when the good news is out there in the market). All deep cyclicals like forestry products, mining, chemicals, autos work like that.

If you are benchmarking against an index then not holding a sector of weighting 2.5% is not high tracking error. That gap of 5% difference from market weighting in Information Technology is going to have a much bigger impact on relative performance (if you get your stock selection wrong and miss the ones that perform).


* in my country, which has only the London to Paris link (High Speed 1), we are building HS2 (north to Birmingham, Manchester & Leeds, Glasgow eventually - so up the west side of England and Scotland). Estimated cost (was £33bn at initiation) is now c £100 bn. Gives you a sense of how these projects spiral (I know California has similar issues).

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