Based on the average returns of IMA sectors since 1983 (30 years of data), Lipper’s head of UK research Ed Moisson looked at what happened to the top performing IMA sector of one year in the subsequent 12 months.
It found that on average the top sector of any given year will rank 15th out of 30 in the following year, while the most commonly recorded subsequent rank was fifth.
The sector that had the best average return in 1983 was ranked sixth in 1984, while 2011’s top performing sector, the UK Index Linked Gilt Sector, fell to 27th in 2012.
Moisson took the same approach with the bottom ranked IMA sector each year, where he witnessed a similar yo-yo pattern. On average the bottom sector in any given year subsequently ranks sixteenth the following year, while the most common subsequent rank was sixth (which occurred four times).
To broaden out the scope of the research Lipper also looked at how the top sector over one year performed in the subsequent five years, which would see investors fare much better.
However, if an investor picks a sector that has outperformed over three years and holds it for one year, a scenario that retail investors could well play out, they are much more likely to be disappointed and would have been better off picking the median or even worst performing sector from the previous three years.
Moisson said: “This research illustrates the hazards of relying too much on sectors that previously offered the best returns. This over-reliance on past sector returns can be 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.”