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Mind The Gap – Right Choice Is Your Priority

Posted by: Ruairi Dennehy
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Great investment performance comes from making consistently good investment choices.
 
The choice is at two levels. Firstly, you need to choose the assets or fund sectors in which to invest. This is the asset allocation decision which we discussed here.
 
The second is choosing the best possible fund within each of these sectors. We primarily use Dynamic Fund Ratings to make that selection, and that is straightforward.
 
The asset allocation decision, in contrast, is often over-complicated, and its importance exaggerated.
 
Some “experts” will tell you that asset allocation accounts for 90% of your performance. Wrong. This was based on a report by Brinson in 1986 (which didn’t actually say that in any event), and which then became repeated for years after, even after it was comprehensively debunked by a separate report in 2000 (by Roger Ibbotson).
 
Even assuming it was possible to consistently identify the best asset classes in advance (it isn’t, at least not easily) let me show you why asset allocation is not the big issue some say it is.
 
The Story Of The Last 6 Months
 
The table at the end of this blog shows the main 26 fund sectors, and their performance in the 2nd half of 2020. The difference between the average sector performances is 26%, a big difference, and suggesting that asset allocation, choosing the right sector, is indeed a big issue, or even THE big issue.
 
Yet the performance gap within many of these sectors is wider, much wider in some cases, than the 26% difference between sectors e.g. the difference between the best and worst funds in the American sector is 50%, and nearly 75% within the Global fund sector.
 
The purpose of this blog, and the table at the end, is to highlight those differences within sectors, which emphasises why Dynamic Fund Ratings are so powerful in helping you make great choices within sectors. Choosing the right funds is vital to your long-term success - in particular having an objective process to select those winning funds.
 
Small But Mighty
 
The UK Smaller Companies sector takes top spot for performance, up 25.6%.  Along with UK All Companies and UK Equity Income, these three sectors were hit particularly hard during the dramatic selloff in March and found themselves occupying the bottom three places for the first half of 2020. UK smaller companies have bounced particularly well, straight back to the top. UK All Companies and UK Equity Income are now comfortably mid-table.
 
Looking more closely within these sectors, it was vital that you chose the right UK smaller company fund. In just 6 months, the best fund was up over 50%, and the worst under 10% - in just 6 months!
 
The very diverse Global sector shows a huge differential between best and worst funds (75%). The best is up 67% and the worst is down 8%. Unsurprisingly, the funds heavily exposed to Tech have thrived while those reliant on oil have struggled.
 
Virus Control
 
Asia has been very successful in limiting outbreaks of the virus, resulting in decent performance, the Asia Pacific sector being up 22.9%, and Global Emerging Markets up slightly more (23.3%).
 
But fracturing is evident in these latter two sectors, meaning the difference between the best and worst funds has increased since the same analysis 6 months ago. For Asia Pacific, the difference between them is 41%, up from 29%. For Global Emerging Markets it is 47%, compared to 30% previously.
 
As always, the Specialist sector (up 13.0%) is a real mixed bag. The best fund is up 48.7% and the worst down 12.5%, creating the second largest gap between best and worst (61.3%).
 
Lastly, the Targeted Absolute Return sector. It is meant to be low risk, but the massive performance gap within the sector between best and worst funds (43%) screams “buyer beware”.
 
For sector-by-sector reviews including individual funds, and a longer version of this blog, see the latest TopFunds Guide.
 
Sector
Performance 6 Months %
Best fund %
Worst fund %
Difference Best/Worst %
UK Smaller Companies
25.6
52.9
8.8
44.1
North American Smaller Companies
25.4
41.9
16.6
25.3
European Smaller Companies
24.8
36.8
12.7
24.1
Global Emerging Markets
23.3
53.5
6.4
47.2
Technology & Telecommunications
23.2
34.2
15.2
19
China/Greater China
23
47.9
2.4
45.5
Asia Pacific Excluding Japan
22.9
48
6.8
41.1
Global
15.1
66.9
-7.9
74.7
Japanese Smaller Companies
14.6
19.5
8.1
11.4
Europe Excluding UK
14.2
39.7
4.3
35.5
Japan
13.5
28.7
0.1
28.6
Specialist
13
48.7
-12.5
61.3
North America
12.8
50.6
0
50.5
UK All Companies
12.4
31.4
0.3
31.2
UK Equity Income
10.2
23.1
1.3
21.8
Global Equity Income
10.1
29.6
-2.6
32.3
Sterling High Yield
8.6
19.7
-1
20.6
Sterling Strategic Bond
5.4
12.8
-3.8
16.6
Sterling Corporate Bond
5.1
11.3
0.9
10.3
Targeted Absolute Return
4.8
34.9
-8.1
43
Global EM Bonds Blended
2.8
11.4
-1.7
13.1
Property Other
1.8
11.1
-5.2
16.3
Global Bonds
1.5
11.6
-7.8
19.4
UK Index Linked Gilts
-0.6
-0.3
-1.8
1.5
UK Gilts
-0.8
0.4
-3
3.4
UK Direct Property
-1
2
-7.9
9.9
Performance data 17/06/2020-31/12/2020
Topic: Fund analysis


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