Mondial Chart of the Week: Return Dispersion in Global Equities 📈
31 May 2020
Source: Bloomberg & Momentum Global Investment Management
What this chart shows
This week’s chart shows the year to date total returns for the ten MSCI World (global developed market equity) sector indices. The intention is to highlight the wide dispersion in sector returns with around a 40% difference between the best and worst performing sectors.
This week’s chart shows the year to date total returns for the ten MSCI World (global developed market equity) sector indices. The intention is to highlight the wide dispersion in sector returns with around a 40% difference between the best and worst-performing sectors relatively unscathed, with demand for their products either proving resilient or increasing.
The former two have now delivered positive returns year to date. On the other hand, the more cyclical sectors such as Energy and Financials have suffered severely, the former given the collapse in the oil price, and the latter driven by banks with ultra-low interest rates challenging future profitability.
Why this chart is relevant
This chart highlights the importance of diversification when investing in equities. Investing too heavily in one sector has the potential to be both rewarding and damaging to an investor’s return, as evidenced by the performance of the various sectors this year. Of course, the outperformers in one period are certainly not guaranteed to continue as such, whilst consistently selecting those which will outperform going forwards is extremely difficult.
Diversifying investments across multiple sectors reduces exposure to sector-specific risk. Active managers can identify opportunities for generating excess returns across and within sectors by taking overweight and underweight positions relative to a benchmark index. Passive strategies, by definition, will always hold outperforming sectors and companies but they will always hold underperformers too.
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