A lot of research time is often spent seeking out the best investment fund managers. But 3 important points to note -
- Like any industry there are few stars but many pretenders,
- 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 sub par returns
- But invest with an ordinary fund manager who in turn happens to invest in sectors that are booming and the results are likely to be outstanding. If only because of the old saying 'a rising tide lifts all ships'
The rough conclusion to this is that it's far better to concentrate on picking the right sectors to invest in than worrying too much about the fund manager.
Some Excellent Research From AC Financial Limited
When it comes to building an investment portfolio there are 4 main sectors -
- Equities
- Property
- Bonds, and
- Cash
Having the right mix of these at the right time will 90% of the time be the key to portfolio success. And research proves this without a doubt (see link at bottom of the page for the PDF version of the report).
AC Financial Ltd, a London based IFA looked into the 25 years worth of unit trust date was analysed looking at both the best and worst performing funds in each sector. Thee research came up with the following conclusions -
- The worst managers in the best sectors dramatically outperformed the best managers in the worst sectors
- In fact the margin was so great it proved that sector selection is far more important than either the fund manager or stock picking
So Which Sectors To Invest In
There are actually 28 main investment sectors (subsections of the 4 main ones listed above).
These 28 sectors are classified by the Investment Management Association (IMA). There are actually 'all IMA' Unit Trusts and OEICS (Open Ended Investment Companies) available to invest in. If you had invested in one of these funds encompassing the whole sector spectrum over the past 25 years, your annual compounded return would have been an excellent 13%.
Therefore not thinking too much, and investing in all the sectors looks like a prudent way of tackling the inherent problems of deciding where to invest for the long term.
Summary
So called 'star' fund managers are generally nothing more than people being in the right place at the right time. Just as much as a 'useless' fund manager is in the wrong place at the wrong time.
It therefore seems somewhat of a waste of time, as the AC Financial study proves, to be looking for the right 'man' to invest with. Instead concentrate on having the right balance of sectors and you won't go far wrong over the long run.
Don't discount this piece of research because for investors with a long term view, 5-10 years+ (SIPP holders etc) it may lead to superior returns. Returns which for most, even the professionals are not easy to earn.
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