Considering an investment in the technology sector? Beware. If you invest in a trend that has already been going for some time, the chances are that you might end up losing money, according to Premier Asset Management’s Simon Evan-Cook.
Looking back at the historical trends, Evan-Cook – senior investment manager for multi-asset funds at Premier – said that, whilst those who got in on an investment trend early made significant returns, investors joining on at the end of the cycle lost out on returns.
“Ideally, you’d want to buy early into a genuine trend that hasn’t been noticed yet,” he explained. “Because if everyone has noticed it, there’s no one left to push up prices.”
The danger of coming to a theme late on, according to Evan-Cook is that even though a trend can take a while to be noticed, once more investors do inevitably jump onto it they “push prices up faster than the assets can generate the returns”.
“In effect, future returns are being dragged forwards,” he explained. “At some point all those future returns have effectively been earnt [now]. Anyone joining at this point is generously paying for the ‘early birds’ to cash in 19 years of returns after just 10 years of waiting.”
The chart shows an equally-weighted portfolio constructed of ‘winners’ – consisting of the top 10 performing Investment Association funds – and ‘losers’ – the 10 worst performers – over the 10-year period to 14 October 2010.
Source: Premier Asset Management
Evan-Cook said the winners were linked by a couple of themes: mainly natural resources and BRICs (Brazil, Russia, India & China).
However, the relative performance of commodities peaked in late-2010 and since there has been a complete reversal in performance.
Source: Premier Asset Management
“If you had blindly backed the 10 ‘worst’ funds of 2010, you would have since outperformed anyone who picked the commodity-heavy ‘best’ funds by a cool 262 per cent,” he explained.
As such, Evan-Cook (pictured) said that investors who join a trend late on are usually right in identifying it but unlikely to see much upside. 
“Late-coming invertors are usually right,” he said. “Just not in a way that makes them any money.
“Those who bought tech funds in 1999 were betting that technology would dominate our lives and that tech companies would dominate future markets. Spot on! Yet they generally lost money over the next 10 years.
He added: “Likewise, those chasing 2010’s winners expected China to keep growing, and to consume mountains of commodities as it did so. Tick! But again they lost money over the following decade.”
Looking at the best performers of the past 10 years, the common themes are US equities and technology-heavy funds. While it might sound cynical to criticise the huge sums still being invested in the sector, the fundamentals remain strong.
Source: Premier Asset Management
Evan-Cook said: “We are not cynical about the power of US companies, in particular US tech companies, to dominate our lives for years to come.
“We are simply worried that the trend is so well popularised, that plenty of their future returns have been dragged forward, thereby raising the risk of a sparse few years while future returns catch up with today’s prices.”
However, Evan-Cook also warned against exclusively backing a portfolio of today’s losers noting that there are many funds in between the 10 best and 10 worst performers.
“And it’s there that we’re focusing most of our exposure,” he said. “There’s simply no need for heroics at this point in a market cycle.”
Evan-Cook is manager on several Premier Asset Management funds, including the five FE Crown-rated Premier Multi-Asset Distribution fund which he co-manages with David Hambidge, Ian Rees and David Thornton.
The £1.5bn multi-asset fund, a quarterly income fund investing in a range of assets and a long-term capital growth target.
Analysts at Square Mile Investment Consulting and Research note that the team “prefer to take exposure to out-of-favour assets that are trading on attractive valuations” usually after a period of weak performance.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Over five years, the fund has made a total return of 33.25 per cent compared with a 25.98 per cent gain for the average IA Mixed Investment 20-60% Shares peer.
Premier Multi-Asset Distribution has a yield of 4.42 per cent and an ongoing charges figure (OCF) of 1.30 per cent.