Indeed, Many Industries Make Up the Market
(Fourth Quarter 2006)

When market indices break new highs, investors are often optimistic about all stocks and support the “rising tide lifts all ships” mantra while the opposite can be said about bear markets. Thinking of the equity market as a unified entity, with stocks behaving similarly and reacting together, allows for a simpler analysis of cause and effect. For example, the media attention on the market focuses on how the market reacts to economic news or political events. But even closer scrutiny by academics often focuses on the whole market to measure efficiency: whether it is a small cap anomaly, January effect, post-earnings announcement drift or other phenomena.

The premise of active management is that value can be added by breaking down the market into components and then carefully picking selected components. Our view is that active managers can benefit from analyzing the risk-return properties of industries rather than the broad market inefficiencies studied by academics or the quick analysis proposed by the media.


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