Page 2 - Equity Investing Through Business Cycles

SUMMARY

The business cycle reflects the fluctuations of activity in an economy,

Certain sectors outperform in various phases of the business cycle while others
underperform.

Generating outperformance among equity sectors is a result of identifying where we are
at in the business cycle and where we anticipate we are going.

By using various metrics, we can attempt to determine where are in the business cycle.

A business cycle approach to asset allocation can be accretive to risk-adjusted returns in
a portfolio.

Equity Sector Investing

Over the intermediate term, asset performance is often driven largely by cyclical factors
tied to the state of the economy—such as corporate earnings, interest rates, and inflation.
The business cycle, which encompasses the cyclical fluctuations in an economy over many
months or a few years, can therefore be a critical determinant of equity returns.

At Pacific Capital, we follow the of legendary John Bogle, "Don't look for the needle in the
haystack, just buy the whole haystack!"

Each equity sector is a haystack of individual companies in that sector. By concentrating our
allocation to one, we can overweight our portfolio to reflect our expectations of the
business cycle. If we are incorrect, we miss out on the upside of various sectors. If we are
correct, we outperform the broader equity market. Either way, we maintain our
diversification and keep a long-term mindset while adjusting to the economic environment
we are in.

The below chart, provided by Fidelity, shows the historical performance of various equity
sectors across the business cycle.

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