Conglomerates, virtually by definition, are an unwieldy and heterogeneous lot. Many have their fingers in multiple industry groups, but not necessarily in the same or overlapping categories. Consequently, it's rare to find sector funds or sector performance statistics that have any particular utility. That said, a look at a select list of top conglomerates shows that this was a pretty challenging year for the sector.
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Only A Few Winners
Admittedly there's some selection bias here, as there is no standard definition of a "conglomerate" and many would-be conglomerates are folded into other industrial or financial categories. Nevertheless, it looks like the winners in the conglomerate space were few and far between.
Tyco (NYSE:TYC) had a solid year, with total returns of about 14% on a year-to-date basis as of this writing. Although growth here has been fairly moderate, the valuation for much of the year was not too challenging.
Itochu (OTCBB:ITOCY) and Hitachi (NYSE:HIT) have also managed to post single-digit positive returns this year. Certainly there were setbacks early in the year from the natural disasters that hit Japan, but rebuilding efforts have created opportunities for these large multinationals. Both companies have also benefited from strong demand in Asian emerging markets for a host of goods and services. (For related reading, see What Is An Emerging Market Economy?)
Europe's a Mess
With all of the talk about how the sovereign debt crisis in Europe has chilled demand and stunted economic growth, it should probably not be a surprise to see the European conglomerates deep in the red. While Siemens (NYSE:SI) outperforms Phillips (NYSE:PHG) across many (if not most) metrics, it hasn't made much of a difference in bottom line performance; Siemens has given back about 24% this year, while Phillips is down more than 30%. Likewise, companies like ABB (NYSE:ABB), Atlas Copco and Sandvik have had pretty unspectacular 2011s as well.
Have-Nots and Have-Less in the U.S.
Frankly, most of the rest of the major conglomerates delivered varying shades of disappointing performance this year. That is not to say that there wasn't some acknowledgment or accommodation to quality.
Berkshire Hathaway (NYSE:BRK.A) and Danaher (NYSE:DHR) were only modest disappointments this year and still may eek out a market-matching return for the year. General Electric (NYSE:GE) and United Technologies (NYSE:UTX) are a bit further in the red, but look poised to lose less than 10% this year.
That is not scintillating performance, to be sure, but it's better than the mid-teens negative performance of other industrial conglomerates like Eaton (NYSE:ETN), Illinois Tool Works (NYSE:ITW) or Emerson (NYSE:EMR).
The Bottom Line
Some companies in the industrial space and/or with significant exposure to the global economy have been very cautious about their 2012 lately and that's not helping the market's overall pessimism regarding growth prospects in the coming year. Although rail traffic in the U.S. has been solid and some areas of shipping seem to be stabilizing, those don't outweigh the worries about Europe's ongoing stagnation and slowing growth in emerging markets.
The advantage to conglomerates is supposed to be a diversification of risk and 2012 will test this thesis. Although valuations for many quality companies are not demanding, investors had best consider the ramifications of slower emerging economies and a still-sluggish North American environment when making their picks. (For related reading, see The Risks Of Investing In Emerging Markets.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.