Overweight
Candlefocus EditorOverweight is an investment decision made by portfolio managers, analysts and investors who prefer to invest in a particular asset, asset type, or sector beyond the expected average portfolio allocation of that asset/sector/type. Overweighting a particular asset/sector/type implies that the investor/manager/analyst expects this particular asset/sector/type to outperform the sector average not just in the near term but over the next 8-12 months.
Many investors use overweight trends to make their decision when investing in stocks or other assets. Investors will often look at the patterns of stock price movements, the financial performance of a company and other factors when considering whether or not to overweight a particular asset or sector in their portfolio.
Why is Overweight Important?
Overweighting has become increasingly important in today’s investment world. Recently, there has been an increasing focus on asset allocation, since the recent health crisis has caused excessive volatility in the market. Even the most experienced investors are looking to make updated, smarter and better decisions when it comes to their portfolio.
Overweighting a particular asset/sector type can enhance the performance of the overall portfolio, as long as the decision to overweight the asset/sector type was made rationally with due diligence and after considering macroeconomic and other factors. Overweight also gives investors an opportunity to diversify their portfolios safely as they balance out multiple asset classes.
How Can Investors Overweight a Particular Asset/Sector?
The best way for an investor to overweight an asset/sector is to identify the asset/sector and its fundamentals which stand out from the peers. They should look for a material difference between the fundamentals of their preferred asset/sector and the rest of the market. This can include higher quality, higher growth potential, pricing power and other factors.
Once the decision to overweight is made, investors can either increase the amount of their investment in a particular asset/sector or reallocate their funds to overweight a particular asset/sector type.
In summary, overweighting is an important element of allocating a portfolio, and it has recently become even more important. Overweighting a particular asset/sector can be beneficial to investors, giving them a chance to boost their overall portfolio returns while reducing the overall level of risk they are taking on. While there are risks associated with overweighting a particular asset/sector, the potential upside makes it an attractive option for many investors.