The temptation to look back at past performance of different fund sectors in order to decide where to invest next is hard to resist. But new research illustrates the hazards of relying too much on sectors that previously posted the best returns.
The analysis by Lipper found that the Investment Management Association (IMA) fund sector that has the best average one year return in each of the past 30 years on average ranks 15th in the subsequent year.
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.
On average over the past 30 years, picking the worst performing fund sector over 5 years (if it were possible to invest in this - it isn’t) would have returned 73.2 per cent over the subsequent five years, whereas picking the top sector over five years would have returned 41.4 per cent.
By contrast, picking the worst performing sector over one year would have returned, on average 41.8 per cent over the subsequent five years, while picking the top sector would have returned 70.7 per cent.
Ed Moisson, Lipper’s Head of UK Research, commented: "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."
| Top performing IMA fund sectors in 2012 | Return (%) |
| IMA UK Smaller Companies | 22.6 |
| IMA European Smaller Companies | 21.4 |
| Bottom performing IMA fund sectors in 2012 | Return (%) |
| IMA UK Index Linked Gilts | 0.2 |
| IMA Short Term Money Market | 0.3 |
| Top performing AIC sectors in 2012 | Return (%) |
| Specialist | 39.6 |
| Property - Securities | 37.7 |
| Bottom performing AIC sectors in 2012 | Return (%) |
| Property - Specialist | -21 |
| Forestry & Timber | -18.9 |
