Lipper’s latest analysis, Sector Averages: The Yo-Yo Effect report, examines the average returns of IMA sectors over the past 30 years and assesses how the best and worst performing sectors have fared in subsequent years.
According to the report, the IMA sector that has the best average one year return in each of the past 30 years on average ranks fifteenth in the subsequent year. The most common subsequent rank is fifth (which occurs three times).
When the same approach is taken with the bottom-ranked IMA sector each year, on average the subsequent rank is 16th. The most common subsequent rank is sixth (which occurs four times).
So the variability in the ranking of IMA sector returns over the past 30 years is such that the average ranking is close to the mid point whether one chooses the top, bottom or middle sector from the previous year. The research also shows how this varies when looking at different time periods.
If an investor had chosen the top sector based on one year returns then, on average, holding that investment for three or five years has been a more successful approach than picking the previous worst sector. By contrast, picking a fund based on the sector average over the past three or five years and holding it for just one year reveals that investors would typically have been better off picking the worst sector.
Ed Moisson, Lipper’s head of UK research and author of the report, says: “This research illustrates the hazards of relying too much on sectors that previously offered the best returns. This over-reliance on past sector returns are applicable for investors in both index trackers and actively managed funds. The former because there is no escape from investors’ asset allocation decisions and the latter because even good managers are still often beholden to the prevailing winds that may buffet a sector.”