The sector selection is one of the most important performance drivers in a corporate bond portfolio. The overweighting and underweighting of different industries is a key element in a corporate bond strategy. The weighting of sectors in a corporate bond portfolio is the result of controlled deviations from the benchmark. They are based on the analysis of the operating environment of specific sectors, a bottom-up analysis of the respective companies and the risk-return profiles of bonds from a specific sector. It is advantageous to set up a corporate bond team by sectors because this structure allows an in-depth coverage of all sectors and the understanding of the competitive environment as well as the market positions and management strategies of single companies out of each sector. An industry consists of a group of firms which offer products that are close substitutes for each other.

Finally, while the subjects of industry analysis and the identification of relative value between sectors are covered in more detail below, it should be noted that the sector allocation has a substantial influence on the risk profile of a corporate bond portfolio. Sectors differ not only with respect to the goods or services they produce, but also with respect to their sensitivity to the economic environment. Therefore, investors usually distinguish between cyclical and noncyclical sectors. In general, cyclical industries are those where the ability to generate revenues and cash flows is closely linked to the business cycle. Usually, this is due to the fact that the companies in those sectors produce goods or services for private consumption or that belong in the category of capital expenditures. Typical examples of cyclical sectors therefore are the automotive and the capital goods sector.