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The best and worst IA sectors on a risk-return basis over the short and long term

06 September 2022

Trustnet looks at which asset classes across the Investment Association universe have delivered the highest returns and the amount of volatility this came with.

By Jonathan Jones,

Editor, Trustnet

Technology stocks, particularly in the US, have been the darlings of the past decade, far outstripping their peers on a risk/return basis, but over the past 12 months this trend has shifted significantly.

So far, 2022 has been a year of change in markets, with the Covid pandemic feeding through to rising inflation on the back of stunted supply chains.

This has forced central banks to reverse their monetary policies of the past 10 years and increase interest rates.

Commodities have been a big beneficiary of this trend, as the below chart shows. While the asset class has delivered above-average volatility over the past year, it has also been by far and away the best performer.

However, IA Infrastructure sector has proved to be a more stable option. The peer group has made the second-highest returns on average, while also exhibiting below-average volatility.

Companies in this sector tend to benefit from steady, reliable income from sources that are often linked to inflation, such as toll roads or doctors’ surgeries.

Scatter chart to show performance and volatility of IA sectors over 1yr

 

Source: FE Analytics

The IA Latin America sector has been one of the most talked-about asset classes over the course of 2022 as investors have perceived it as a play on the broader commodity theme.

Last week, Redwheel fund manager John Malloy said around 50% of its exports are commodity related.

However, although returns have been in the upper quartile of IA sectors over the past year, the volatility has been far greater than elsewhere. The next most volatile sector (IA Technology and Technology Innovations) is some 10 percentage points behind Latin America.

Elsewhere, India has proved to be a reliable investment over the past 12 months, despite being a net importer of commodities.

Anthony Leatham, investment trust analyst at Peel Hunt, said: “Following eight years of economic reform, corporate earnings in India are going through a period of sustained growth.”

Earnings were up 33% for the most recent financial year and analysts expect 16% year-on-year growth for the next two years, which represents a “compelling rationale” for investing in the region.

Despite the narrative that US technology stocks have struggled, the IA North America sector has remained one of the better options for investors over the past 12 months.

And while the prevailing narrative is that UK companies have finally come good in 2022, the strong dollar has meant the US market remains ahead this year, although it has been slightly more volatile.

It is, however, the tech stocks that have struggled. As mentioned above, the IA Technology and Technology Innovations sector has been the second-most volatile and is among the worst performers year to date.

This is in stark contrast to the trend of the past 10 years, in which the sector was by far the best option for investors. On average, funds in the sector made the most money for investors over this time, while the volatility was not unbearably high.

Healthcare stocks also performed well, with lower volatility, albeit also lower gains. The dominance of the two sectors shows how narrow the market has been for much of the period.

Over the decade, commodity funds were more volatile, as were Indian equities, showing that even while they have risen this year, these asset classes have historically given investors a choppy ride.

Scatter chart to show performance and volatility of IA sectors over 10yrs

 

Source: FE Analytics

The IA UK Equity Income and IA UK All Companies sectors were among the most volatile over the decade, without offering investors the rewards of other asset classes.

 

In this series, Trustnet will look at individual sectors to show the funds that have represented the best risk-reward options for investors, both historically and in the present environment.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.