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Carburton Street, London -- In a year when stock market news was dominated by telecommunications and technology it is a shock to see that the best sectors were actually mainly old economy ones. With the possible exception of the pharmaceutical sector, all the top ten sectors this year were very boring businesses that have been around for a long time.
This table gives the details.
Sector Percentage gain since January 1 Tobacco 48.6% Personal and Household Care 47.8% Food and Drug Retailers 37.0% Insurance 29.7% Speciality and other Finance 24.2% Beverages 21.3% Food Producers and Processors 21.2% Pharmaceuticals 18.2% Water 18.2% Health 16.7%
At one time the tobacco sector had shrunk to just one company. Even though it has now expanded to three, the bulk of this sector still consists of British American Tobacco (LSE: BATS). The reason it has done so well is simply that it got hugely oversold in 1999 because of fears over liabilities in the US from smoking-related illnesses. Even after its rise this year from 250p to 532p it is still only on a price to earnings ratio of 10 and yields 5%. Proof positive of the efficacy of value investing.
The next best performing sector is Personal Care and Household products. With two constituents and 98% of the value in Reckitt Benckiser (LSE: RB.), this sector is even more select than tobacco. From a low of close to 600p at the start of the year this share has climbed to over 900p, although at this level it is trading on ratios that are near to the market average. Twelve months ago it was obviously much cheaper than the market as a whole.
Food and Drug Retailers lie in third place and this sector at least has a decent number of shares in it. It contains nine companies, but nearly three-quarters of the value is captured by just two of them: Tesco (LSE: TSCO) and Sainsbury (LSE: SBRY), with the former accounting for half the value on its own. Most of the gains in the sector came from the steady rise in Tesco throughout the year, although that move increased in the second half once it became clear the TMT mania was not all it was cracked up to be. Retailers provided a nice safe haven as an alternative.
The good performance from the Insurance sector is slightly surprising as its returns are normally closely correlated with the gilt market. Insurers generally lose money on underwriting but make it up on their investment portfolio, which is mostly in gilts and equities. But yet again we see the two features that are consistently present in this year's best performing sectors: a dominant company, and one that started the year at a very low valuation. In this case it was Royal and Sun Alliance (LSE: RSA). Even after it fell to 300p from a starting level of over 470p it is ending the year at over 560, but still on a significant discount to the market in terms of price to earnings ratio (18) and a yield of 4.4%.
It isn't until we get to Speciality and Other Finance that we find a sector with a really decent number of shares in it. This group of 29 are mostly stockbrokers and fund managers and the £18b of new money raised in London this year, well over twice last year's level, has been a bonanza for them. The biggest company is Amvescap (LSE: AVZ), which cemented its position at the top by buying rival fund manager Perpetual during the year.
The Beverage sector was another cheap old economy sector dominated by one stock, in this case Diageo (LSE: DGE), which ended the year in fine form by buying some of the drinks businesses of Seagram.
After the atrocious year utilities had in 1999 there was no way 2000 could be as bad. Even though earnings fell because of the new pricing regime the shares made steady progress. In that they were helped by bids for two of the constituents: Thames Water and Hyder.
Food Producers and Processors also exhibit the features that define the best performers this year: cheap old economy stocks. Unilever (LSE: ULVR) is the biggest company, but is chased by Cadbury Schweppes (LSE: CBRY).
Pharmaceuticals shares benefited from two trends this year. One was the flight to non-cyclical stocks ands the other was excitement created by the much-delayed merger of its two largest members: Glaxo Wellcome (LSE: GLXO) and SmithKline Beecham (LSE: SB.) The transfer of Celltech (LSE: CCH) into this sector after it bought Medeva was also a positive factor.
Finally, Health makes up the tenth best-performing sector. Medisys (LSE: MDY) was the star performer here.
What can we learn from this analysis? I think that is clear. High quality large companies that have been pushed down to unreasonably low valuations can provide superb investment opportunities to the sagacious Fool.
Happy Christmas, everybody.
Where Next?
• Worst Performing Sectors of 2000
• Investment Strategies discussion board
Other Foolish Christmas Specials
• Vote for the best article of the year
• Review of the year in the Fool Community
• What the Fool's writers wish they hadn't written