changes have been dramatic. The materials sector, by far the largest in
1957, has become the smallest today. The materials and energy sectors
made up almost one-half of the market value of the index in 1957, but
today these two sectors together constitute only 12 percent of the index.
On the other hand, the financial, healthcare, and technology sectors,
which started off as the three smallest sectors and comprised only 6 per-
cent of the index in 1957, held one-half of the market value of all S&P 500
firms in 2007.
It is important to realize that when measured over long periods of
time, the rising or falling market shares do not necessarily correlate with
rising or falling investor returns. That is because change in sector shares
often reflects the change in the numberof firms, not just the change in the
valueof individual firms. This is especially true in the financial sector, as
commercial and investment banks, insurance companies, brokerage
houses, and government-sponsored enterprises such as Fannie Mae and
Freddie Mac have been added to the index since 1957. The technology
share has also increased primarily because of the addition of new firms.
In 1957, IBM was two-thirds the technology sector; in 2007, IBM was
only the third largest in a sector that contains 74 firms.
The returns of the 10 GICS sectors against the changein their mar-
ket share over the past 50 years are plotted in Figure 4-2. The fast-grow-
ing financial and technology sectors have had only mediocre returns.
The weight of their sectors has increased not because the prices of indi-
vidual firms have risen but because many new firms have been added
to the index.
In contrast, the energy sector shrunk from 22 to 8 percent of the
market weight of the index, yet its return of 12.87 percent is well above
the S&P 500 Index. Statistical analysis shows that over the past 50 years
only 20 percent of the return to a sector is related to whether the sector
is expanding or contracting. This means that 80 percent of the investor
return of a sector is based on the valuation of the firms in the sector, not
the relative growth of the industry. Rapidly expanding sectors often in-
duce investors to pay too high a price, which results in lower returns.
As a result, the best values are often found in stagnant or declining sec-
tors that are ignored by investors and whose price is low relative to
fundamentals.
The performance of the 20 largest companies that Standard &
Poor’s put into their first list in 1957 is shown in Table 4-1. One feature
that stands out is that all 9 oil companies on the list finished in the top 10,
with only General Electric nudging ahead of Phillips Petroleum and Tex-
aco for eighth place. The returns on all the oil companies beat the S&P
54 PART 1 The Verdict of History