Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

How to Overweight One Sector in a Portfolio

For some portfolios, it may be desirable to overweight holdings in one sector relative to the remaining ten sectors, presumably which will be equally weighted. There is a simple way of achieving this goal.

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In order to overweight a specific sector within a portfolio, one should start with a portfolio designed for a reasonably large number of stock positions. Otherwise the resolution of the weights will be poor and it will be difficult to achieve the desired objective.

The examples in this post use a portfolio designed for 50 positions. 

Screenshot of position sizing

As an example, achieving an overweight position in the Consumer DIscretionary sector could be done by using the following Buy rule:

Eval(Sector=Discretionary,FOrder("Rank",#Sector)<=10,FOrder("Rank",#Sector)<=4)

This Buy rule allows only the top-rated stocks from each sector to be purchased. In this case, the ten top rated Discretionary stocks and the top four rated stocks from the remaining sectors.

Screenshot of the Buy rule that will overweight the Discretionary sector

There are two key points to using this formula.  First is that the weight ratio of the Discretionary to any other sector will be approximately 10 / 4 or 2.5:1. The second point is that the total number of stocks to choose from based on the FOrder statements is 50.  i.e. 10 from the Discretionary sector and 40 from the remaining sectors (10 sectors x 4 per sector). Since the position sizing is set for 50 stocks and the Buy rule is allowing only 50 stocks, then the sectors other than Discretionary will be approximately of equal weight.

Screenshot of the current allocation of sectors

If the Buy rule allows less than 50 stocks, then the portfolio may not be fully utilized. If more than 50 stocks are allowed by the Buy rule, then the remaining sectors held may not be of equal weight. For example, if one wants to hold double the weight in the Discretionary sector as opposed to the other sectors then use the Buy rule shown below:

Screenshot of Discretionary double-weight rule

There are now more than 50 stocks allowed through the Buy rule. The sector allocation will look something like this:

Screenshot of current allocation with Discretionary double-weight

If the designer wants to have double weighting in one sector and equal weighting in the rest, then an appropriate position size setting is required to make it happen. Then the Buy rule has to be tailored to the position setting.

by Steve Auger