I’m a subscriber to The Economist. Being a libertarian, this is the best newspaper there is, even though it’s not perfect and over the years have become a bit more leftist (?).
Still, I strongly recommend it. In the January 12th, 2013 issue there is an interesting article on page 59 (I can’t find a link on the internet to it). The article refers to a study done by Lipper.
Lipper analyzed the records of British mutual funds over the past 30 years. They compared the records of the best performing, median, and worst-performing British sectors over one-, three- and five-year periods.
Lipper concludes two things:
Momentum only works in the short term
The first is momentum, the tendency for shares that have performed well to continue to do so.
However, this force only works short-term. Buying a fund in the best-performing sector of the previous year earns a higher average return over the next year than either the worst or the median performer.
Mutual funds revert to the mean
The second force is the reversion to the mean, but this shows up over longer periods. Investors selecting a sector on the basis of its prior five-year performance would have earned much higher returns over the following five years by selecting the worst-performing sector than the best. The gap is more than 30 percentage points!
The worst performing sector the previous 5 years is the property sector. According to the study, this should be the sector to invest in now.
– What is the first finding from Lipper’s analysis?
The first finding suggests that momentum, the tendency for shares that have performed well to continue performing well, primarily works in the short term. It indicates that buying a fund in the best-performing sector of the previous year tends to result in a higher average return over the next year compared to the worst or median performers.
– How much higher were the returns for investors who selected the worst-performing sector according to the study?
According to the study, investors who selected the worst-performing sector over the previous five years earned returns that were more than 30 percentage points higher than those who chose the best-performing sector.
– Which sector does the study recommend as an investment based on its historical performance?
The study suggests that the worst-performing sector over the previous five years, which was identified as the property sector, should be the one to consider for investment.