Sector performance data

aroominyork

Can I please check something about graphs showing sector performance compared to index funds. Is the sector (eg IA Global) the performance of all funds – or maybe just actively managed funds? – in the sector? And if so, does the gap between the sector and an index fund show the underperformance of actively managed funds against the index? And finally, does the sector data give equal weighting to each fund, Nikkei-style, or does it weight them by AUM?

masonic

I've not paid much heed to sector average data, as I don't know how it is being generated. I do know that it is generated by FE fundinfo using lists of funds in each sector maintained by the Investment Association. You can download the fund list of all funds classified into an IA sector from the IA website to see what is in there. Or you can go to the sectors pages in Trustnet to explore the funds it includes in each one.

I suspect that the sector average suffers from survivorship bias, as funds that have been shut down or merged into other funds will not be in the current fund list, and I doubt FE adds them back in when working backwards through time. They probably just take the current list and combine their available performance history.

The other issue is the sectors are very broad and contain funds with a wide range of risk score and different strategies and themes. I can't really see the value of averaging say Luxembourg Selection Fund Active Solar and Invesco CoinShares Global Blockchain with Invesco Global Smaller Companies or UBS MSCI World Minimum Volatility. If you asked me for examples of a global fund, I'd probably only consider the last as qualifying. But it seems there is no IA Global Smaller Companies sector (just Global Equity Income), and the other two seem to have escaped classification as Specialist.

dunstonh

IA global is the average of all funds in the IA global sector.   
However, IA global allows 80%+ equities and includes niche funds.   So, all funds in that sector are not created equal in either asset mix or risk level.

does the gap between the sector and an index fund show the underperformance of actively managed funds against the index? 

No. Not at all.

For example, lets say there were two funds in the IA global sector.  one with 80% equities and one with 100% equities.  Over the long term, the 100% equities fund would do best in most periods.   The 80% less so.  The sector average of those two funds would be in the middle between the two.

 does the sector data give equal weighting to each fund, Nikkei-style, or does it weight them by AUM?

It is just the median of all the funds in that sector over that period.

On your chart, the ishares fund happened to be heavy in the region that was best in that cycle.  So, that shoved it higher up the pecking order.   However, if you take the cycle before that, it performed less than sector average as the area it was heaviest in did worse as per the chart below:

The ishares fund doesnt have a long history so I substituted with the L&G fund which has been around much longer (it tracks FTSE world).  If we take it back to 1990, you can see the Global tracker has underperformed sector average as much 

If we take just that last 10 years where US equities have been dominant it is the other way around. 

So, the period when US equities was best, the tracker outperformed sector average.  When US equities was the poor performer, then the tracker underperformed sector average.