Sector Revelations

Fri 22 Jun 2018

By Brian Dennehy

Membership Access | free

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If you are not easily scared off, the year so far has been pretty good for most global stock markets, unless you were over-committed to emerging markets.

If you are not easily scared off, the year so far has been pretty good for most global stock markets, unless you were over-committed to emerging markets. 
Just the average performance in each of the top 6 sectors exceeded 5%. Even if you were right on the sectors, you might still have missed out on some extraordinary gains. Why? Because we (and that is probably all of us) are simply not very well adjusted to be outstanding investors. Here are a couple of examples.
We get scared by headlines. It was vital to look beyond the headlines in the last 6 months. The headlines told us that the greatest concerns, in no particular order, were: Trump; trade wars, particularly US vs China; Brexit; Europe imploding (again). Yet 5 of the top 6 fund sectors are Technology (dominated by the US), two US stock market sectors, UK Smaller Companies, and China.   European Smaller Companies are in a respectable 8th spot.
If you over-emphasised the typical low risk funds you have again had a disappointing 6 months, with the bottom 6 dominated by various bond fund sectors, with only one exception. The headlines tell us that inflation is taking off – yet Index Linked Gilt funds are down. Hmmm. Other headlines say the commercial property market is collapsing as High Street retailers implode. The reality is that “bricks and mortar” property funds are up 2.14% on average so far this year – more than respectable.
Are you sensing a lesson here? Ignore headlines designed to sell newspapers - at least so far as your investing is concerned.
We hate change. Notice how US Smaller Companies are rocketing up this performance table – you can see it better if you have access to a chart. This time last year this sector was bottom and was mid-table earlier this year. To capture this sort of potential your investing strategy needs to be flexible. There must be a review point that enables you to switch into sectors which, yes, have momentum. But you must also have a plan which doesn’t just buy a passive fund or index tracker covering US smaller companies, it must discriminate between funds with greater potential and the laggards.
For example, in this one US fund sector the difference was nearly 15% over just 6 months between the best and worst funds. 
You must have a systematic process to benefit from all of this potential. The solution is to combine our Dynamic Fund Ratings and our Dynamic Global II Portfolio.  If you can think of any refinements to improve on this (see last week’s back-test) or any other processes where there is evidence of a better outcome, do let us know.
This will all be covered in more detail in the upcoming TopFunds Guide. We will let you know when it is available.


Table 1: Sector review including best and worst funds
Sector Performance 6 Months % Best fund % Worst fund % Difference (Best-Worst) %
 Technology & Telecommunications 14.75 22.54 3.73 18.81
 North American Smaller Companies 11.96 21.65 6.66 14.99
 North America 7.02 33.47 -0.11 33.58
 Japanese Smaller Companies 7.02 13.72 -2.79 16.51
 UK Smaller Companies 5.75 12.92 -5.32 18.24
 China/Greater China 5.65 8.75 2.02 6.73
 Global 3.25 24.45 -5.11 29.56
 European Smaller Companies 3.11 11.29 -2.24 13.53
 UK All Companies 2.64 11.58 -11.77 23.35
 Property 1.71 5.66 -10.45 16.11
 UK Equity Income 1.57 8.95 -5.04 13.99
 Japan 1.13 12.78 -8.02 20.80
 Global Equity Income 0.38 11.39 -6.36 17.75
 UK Gilts 0.15 1.07 -0.76 1.83
 Asia Pacific Excluding Japan -0.13 2.78 -4.48 7.26
 Europe Excluding UK -0.32 10.06 -7.04 17.10
 Sterling High Yield -0.48 0.63 -1.60 2.23
 Targeted Absolute Return -0.75 8.29 -17.35 25.64
 Specialist -0.81 12.04 -16.06 28.10
 Global Bonds -0.88 1.44 -4.09 5.53
 UK Index Linked Gilts -0.98 -0.48 -1.48 1.00
 Sterling Corporate Bond -1.05 0.16 -2.86 3.02
 Sterling Strategic Bond -1.09 0.49 -5.90 6.39
 Global Emerging Markets -4.59 3.75 -10.49 14.24
 Global Emerging Markets Bond -4.91 -3.38 -7.72 4.34
Performance data: 01/01/2018-19/06/2018, UT & OEICs universe, Main units only  


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