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Why the right sectors are more important than the right fund manager

Investing in the stockmarket can be dangerous without some well though out strategy. Fortunately, some interesting research has been published by the Independent Financial Advisor (IFA) AC Financial Ltd.

Sectors are more important than fund managers

Investors often spend a lot of research time researching and seeking out the best fund managers. But according to AC's research (more details below) there are 3 important points to note -

  1. Like any industry there are few stars but many pretenders
  2. Investing with the world's best fund manager who then in turn invests in the world's worst performing sector (or stockmarket) is likely to produce subpar returns
  3. But invest with a so-so manager who in turn happens to invest in sectors that are booming, and the results are likely to be outstanding

The rough conclusion to the 3 points is that it's far better to concentrate on picking the right sectors to invest in (sector means UK Gilt, Property, UK smaller companies etc) rather than worrying too much about the individual fund managers, irrespective of their previous track records.

AC Financial's research

When it comes to building an investment portfolio there are 4 main asset classes -

  • Equities
  • Property
  • Bonds, and
  • Cash

Having the right mix of these at the right time is the key to building a great portfolio, one that balances risk with potential reward.

AC Financial Ltd, a Milton Keynes financial advisor, has published 2 related reports which analysed unit trust performance over 25 years (1979 - 2004) and from 2005 - 2009.

The research looked at both the best and worst performing funds in each investment sector and came up with the following conclusions -

  • The worst managers in the best sectors dramatically outperformed the best managers in the worst sectors
  • The margin was so great it proved that sector selection is far more important than either the fund manager or stock picking
Where and how to invest

The downside to AC's research is that it doesn't tell us where to invest right now, ie today. So are there any rules or guidelines investors can use to start building an investment portfolio, or reorganising one?

Yes, read AC Financial's first report carefully as it highlights a successful strategy where money is invested into 28 different investment sectors. And the past results look good as from 1979 to present the annual return averaged around 13%. Some years of course were losers, others spectacular gains, but overall the balanced portfolio does a good job of balancing risk and reward.

More details on the 2 reports -

FREE Stocks & Shares ISA Report
Why you must think long term with ISAs
Costs and charges - How to slash them
The best broker to use - and why
How to build a Portfolio of different asset classes
More details

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