What is overweight in Portfolio Management?

An overweight investment is a sector of assets or industries that contains a larger portfolio than usual or an index. An investor may choose to dedicate most of his portfolio to a sector that appears to be particularly promising, or the investor may gain excess weight on defense stocks and bonds at a time when prices are fluctuating.

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Overweight and its opposite, underweight are also used by analysts and commentators in recommendations for acquiring or avoiding certain investments or sectors. For example, if federal defense spending is going to increase or decrease, the analyst may recommend that the investor gain excess weight or underdevelopment for defense-related businesses.

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In addition, many analysts are adding overweight recommendations to the stock, which they believe will surpass its sector in the coming months. Alternative ratings - the same weight (for average performers) or underweight (for performers below average).

KEY TAKES

Being overweight is a large investment in a particular asset, asset type or sector in a portfolio.

Overweight, rather than the same weight or underweight, also reflects the analyst's view that a particular stock will exceed the industry average over the next eight to 12 months.

Portfolio managers may be overweight in stocks or sectors if they think they will work well and increase overall returns.

Understanding overweight

Strictly speaking, overweight refers to the excess amount of a fund's asset or investment portfolio compared to the underlying index it tracks.

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Indices are weighed. That is, they monitor the effectiveness of the choice of stocks, each of which is a percentage of the index, which varies depending on its perceived impact as a whole.

Mutual funds are also weighed, and a certain percentage of the fund can be used for cash or interest-bearing bonds to reduce overall risk. That is why the efficiency of even index mutual funds may differ in part from each other and from the index itself.

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The purpose of the fund manager is to achieve or exceed the indicator with which he is compared. This can be achieved by being overweight or underweight by some parts of the whole.

Victory in the trend

Otherwise, there is no clear definition of overweight. It's just a deviation from the norm, whatever it was. For example, a global technology fund manager who predicts a downturn in the future may transfer some assets that are overweight to some of the most stable blue chip companies. An investor with a diversified portfolio that has predicted a downturn may lead to an overweight on interest-bearing bonds and dividends.

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Excess weight can also refer to the analyst's opinion that the stock is superior to others in its sector or market. In this sense, it is a purchase recommendation. When an analyst assumes that an asset is underweight, they say it now looks less attractive than other investment options.

Slip rate

Portfolio managers strive to create a balanced portfolio for each investor and personalize it for that person's risk tolerance. For example, a portfolio of 60% of stocks and 40% of bonds is best for a young investor with a moderate risk appetite. If the same investor decides to transfer 15% more balance on shares, the portfolio will be classified as excess reserves.

A portfolio may be overweight in a sector such as energy or in a particular country. This can be overweight in such categories as aggressive growth stocks or stocks with high dividends.

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Advantages and disadvantages

Actively managed funds or portfolios are overweight, in particular, securities, if it will help them achieve greater returns. For example, a fund manager may raise the weight of securities from the usual 15% of the portfolio to 25%, trying to increase the return on the total portfolio.

Another reason for the holding company's excess weight in the portfolio is hedging or reducing the risk of another overweight position. Hedging involves the acceptance of compensation or the opposite provision to the appropriate collateral. The most common method of hedging is through the derivatives market.

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For example, if you own shares in a company that currently sells for $ 20 per share, you can purchase a one-year option for that share for $ 10. A year later, if the stock sells for more than $ 10, you give an expiration date, losing only the purchase price. If the stock sells for less than $ 10, you can take advantage of the bid and get $ 10 for your stock.

The danger of overweight one investment is that it can reduce the overall diversification of their portfolio. Reducing diversification may expose the holding to additional market risk.

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