Are ‘boring’ sectors back? | MoneyWeek
The market has had an up and down year, driven largely by volatility in tech and artificial intelligence (AI) stocks. The CBOE Volatility Index (often referred to as the VIX), an index which measures the stock market’s expected volatility based on S&P 500 options, reached 35 in March (following the outbreak of the war in Iran), levels only surpassed in the last five years by 2025’s tariff turmoil and the outbreak of the war in Ukraine.
The S&P 500 has ranged from 6,317 to 7,794 so far this year, meaning its year-to-date returns have been as low as -7.7% and as high as 13.9%. These rises and falls are largely correlated with the performance of the big tech stocks that dominate the index: Nvidia’s share price, for example, has ranged from lows of $164.27 to highs of $236.54 in the year so far.
Some investors like volatility, but it isn’t for everyone. According to the latest fund flow data from the Investment Association, an industry body representing UK asset managers, retail investors put more money into funds during June than any month since August 2021 – but this was largely directed towards defensive strategies such as bonds or cash-like assets.
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“Exciting investments have an unfortunate habit of becoming expensive precisely because everyone finds them exciting,” said Simon Skinner, head of investments at asset manager Orbis Investments. “By the time the story feels obvious, the crowd has usually arrived and a great deal of optimism is already reflected in the price.”
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So-called ‘boring’ investments – the more traditional, steady stocks and sectors – can have the opposite problem. “If nobody wants to talk about them, expectations tend to be lower and valuations often are too,” said Skinner.
There is a case to be made for the boring stocks, though, especially if you are trying to preserve your capital or generate steady income.
“Some of the best long-term investments can be businesses that do relatively mundane things exceptionally well, generate cash consistently and compound that cash for shareholders over many years,” said Marcel Stötzel, portfolio manager of Fidelity European Trust PLC and Fidelity European Fund.
Where does volatility come from?
Some sectors are inherently volatile. As Skinner puts it: “Volatility tends to be greatest where the gap between the story and the fundamentals can grow widest.”
He points to tech as the obvious example. “Valuations often depend on profits expected many years into the future, which leaves a lot of room for imagination – in both directions. When a compelling narrative takes hold, investors pile in and prices can detach quite dramatically from any reasonable assessment of value.”
But any slight threat to the optimistic narrative – be it disappointing growth numbers, capital expenditure or returns on investment – can quickly reverse this effect, taking most of the market with it when capital is concentrated into a small number of correlated stocks.
“When the story wobbles, [investors] can rush out just as quickly,” Skinner added.
Tech is also highly sensitive to interest rates. When present-day value is calculated based on future expectations, interest rates assumptions are one of the key variables.
“Growth stocks tend to have more of their earnings further out than value stocks, because they’re growing and the market’s valuing that growth,” said David Cumming, head of UK equities at investment manager BNY Investments Newton. When interest rates rise, the present-day value of these future earnings (relative to other assets like bonds) falls.
Current levels of market concentration are consistent with several of history’s largest bubbles, which Skinner points out often coincide with periods of optimism in a few narrow areas.
“The problem isn’t concentration alone,” said Skinner. “It’s concentration around a shared narrative. If a handful of very large companies are being valued on broadly the same assumptions about the future, then what looks like a diversified index can behave like a single trade when those assumptions change.”
What are some less volatile sectors?
Consumer staples, utilities and healthcare
The steadiest sectors tend to be those where demand has little to do with economic conditions or a compelling narrative – especially consumer staples, utilities and most healthcare stocks.
“People still buy toothpaste, electricity and medicine in good times and bad,” said Skinner. “Cash flows are therefore relatively predictable and, importantly, near-term. That leaves less room for imagination.
“It’s difficult to persuade yourself that a water utility is going to change the world – but equally difficult to panic that it’s suddenly worth nothing,” he added.
“Healthcare tends to go up when tech goes down,” said Cumming. The sector is “actually very cheap relative to history now, because it’s viewed as boring, and that means it looks reasonably attractive.”
Healthcare companies are also among those most likely to benefit from AI as end-users.
Some effective ways of accessing these sectors are the Xtrackers MSCI World Consumer Staples UCITS ETF (LON:XWCS), the Worldwide HealthCare Trust (LON:WWH) and the iShares S&P 500 Utilities Sector UCITS ETF (LON:IUSU).
Financials
Banks aren’t the flashiest sector to invest in, but they can offer some protection in certain circumstances.
“As long as the economy is doing OK, financials can offer protection,” said Cumming. “Financials only run into trouble if there’s going to be a recession.”
On the other hand, they can be another source of volatility in certain conditions.
“Financials can also be volatile, particularly more highly leveraged or complex banks, because changes in interest rates, credit conditions and the economic outlook can have a disproportionate impact on profitability,” said Stötzel.
Automotive
The automotive sector is “the most unloved sector in the world by far”, according to Cumming.
He highlights Volkswagen (FRANKFURT:VO), which currently trades at less than four times its expected earnings.
“Some of these stocks are wildly cheap,” he says, particularly if the EU is able to shore up the market against competition from China.
The case for balance and value
Most of the aforementioned less volatile sectors have underperformed tech in the year to date, and over longer timescales.
That’s not to say you wouldn’t be grateful to have them in your portfolio if the tech rally reverses, but as long as tech continues to dominate, any money invested in these sectors could act to hamper your returns rather than improve them.
“Balance should not mean abandoning growth,” said Sam North, market analyst at investment platform eToro. While the long-term AI investment case remains intact, in North’s opinion, it is still important to recognise that “no theme should dominate a portfolio indefinitely” and holding “more predictable companies can reduce drawdowns, provide income and give investors capital to rebalance into growth assets during periods of volatility”.
It’s also worth remembering not to focus entirely on the sector alone when considering defensive investments.
“We would be wary of assuming that every company in a traditionally defensive sector is automatically low risk,” said Stötzel. “Business models change, balance sheets matter and even apparently defensive companies can become vulnerable if they have too much debt, weak cash generation or an unsustainable valuation.”
Besides exploring defensive sectors, Skinner also advocates attention to the price you pay as the more durable form of protection.
“It’s worth distinguishing volatility from risk,” he said. “For a long-term investor, a share price moving around isn’t necessarily risky. Permanently overpaying for a business is.
“If you buy a share well below a sensible estimate of what the business is worth, you have a cushion,” Skinner continued. “A fair amount can go wrong without permanently impairing your capital because some bad news is already reflected in the price.”
Similarly, Stötzel advocates looking at business fundamentals rather than sectors to provide protection. “What protects investors in one downturn may behave quite differently in the next,” he said. “For us, protection comes more from the characteristics of the businesses you own: strong balance sheets, sustainable cash generation, pricing power and management teams that allocate capital sensibly.”
