The best-performing sector of the decade
Here at Livewire, we love charts. Nothing excites us more than when an interesting dataset crosses our channels, and we have recently been blessed with a high-quality summary produced by Schroders Australia that unpacks the annual returns across different Australian equity sectors. Capturing a comprehensive 15 years of information, this report offers key insights about relative performances and emerging sectoral themes.
While unpredictability and constant fluctuations in thinking mean one cannot rely on the past repeating itself, understanding long term patterns and the catalysts driving these still holds value. After all, as Carl Sagan used to say: “You have to know the past to understand the present.”
In this wire, we will unpack the best and worst-performing sectors over the last 10 years, and reflect on the trends driving capital allocation across sectors.
The chart in question offers a sector by sector breakdown of returns between 2006 - 2020, compared against the benchmark S&P ASX300 index.
The long game
As an exercise, we plotted the movement of a $10k investment over the decade across each sector in order to map out relative performances based on the Schroders data.
The results were as follows (Ending amount after initial investment)
- Healthcare ($60,303.71)
- Information Technology ($43,511.83)
- A-REITs ($28,452.55)
- Utilities ($27,074.00)
- Consumer Discretionary ($26,752.23)
- Consumer Staples ($24,864.42)
- Industrials ($23,600.86)
- S&P ASX300 ($21,493.14)
- Communication Services ($20,937.19)
- Financials ($20,526.68)
- Financials Ex A-REITs ($19,624.71)
- Materials ($17,676.38)
- Energy ($6,933.72)
Australia has long held one of the most innovative healthcare spaces in the world, fuelled by the incessant growth of CSL and complemented by perennial performers in Sonic Healthcare and Cochlear. This drove it to be the top-performing sector for Australian equities over the last decade, with an average return of 17.74% p.a. Despite a sluggish (by its standards) 2020 brought on by global uncertainty, the continued interest in Mesoblast, Avita Healthcare and Polynovo (3 of your favourite small caps for 2021) means there is plenty of excitement to come.
Coming in second place was Information Technology, driven by the emergence of our very own WAAAX stocks as well as mainstays such as Computershare. The annualised return over the decade for IT was 14.30% p.a. It has experienced explosive growth since 2017, coincidently (or not) the year Afterpay began to make noise in public markets. With the sector growing 57.77% in 2020 alone - the highest single sector annual growth since 2005 - concerns about bubbles and excessive valuations are certainly justified. We will have to watch this space to see whether it will be sustainable in a post-Covid context.
The evolving economy
Only one major sector ended the decade in the red: Energy. With grave concerns about climate change and pollution on top of the development of viable alternatives to fossil fuels, shareholders appear to be pivoting away from the industry.
An investment portfolio that included the top 300 companies on the ASX but excluded companies involved in the fossil fuel industry would have improved annual returns by 8.6 per cent over the last decade. - The Renew Economy
There remain a few favoured names operating in this space, such as Woodside Petroleum (recently voted your 4th favourite large-cap for 2021). Despite falling 30% in 2020 on the back of a tumbling oil price, it shapes as the pick of the bunch over competitors such as Oil Search and Origin Energy, given lower production costs and gearing.
Market Matters: Other points of note
Looking at the ASX300, if you were to have invested 10,000 at the start of 2010, you would now have $21,493.14, growing at an average rate of 7.2% p.a.
During the 2008 GFC, the best performing sector was healthcare with a negative return of 9.07%, the ASX300 falling 38.92%. In contrast, the index ended the year up 1.73% despite 2020's recession, with the top-performing sector (perhaps unsurprisingly) been IT (+57.77%). Whether investors are applying lessons from past corrections or we are dealing with a completely new beast, the next few months will be telling.
What this means for asset allocation
In analysing this information, Schroders Deputy Head of Australian Equities, Andrew Fleming shared his sectoral insights and key considerations when it comes to asset allocation. The key takeaway is the importance of maintaining a consistent investment philosophy regardless of sectors, while still factoring appropriate adjustments where needed - for example, the volatility of a mining company versus an infrastructure asset.
Despite the rampant success of technology both domestically and on a global scale from a returns perspective, it remains to be seen whether material profitability can be achieved down the track.
Looking at the trends to emerge, Fleming is approaching this with caution given the uncertainty continuing to brew. Generally, position sizing is a product of the individual company valuations over macro trends, however, the lines appear to be blurring:
"Interest rates have such a strong pervasive impact across the market; and more recently, government subsidies and incentives have had a massive impact upon the results recorded by retailers and building material companies, among others. The best we can aim for is neutrality across stocks and sectors, such that our economic assumptions are coherent and consistently applied across sectors and then stocks."
Despite a turbulent end to the decade, the 2010s were a very positive year for Australian equities across the board. 9 out of the 12 major sectors would have more than doubled an initial 2010 investment, with Healthcare and Information Technology unsurprisingly the top performers. These sectors are also home to some of the most volatile names, so brace yourselves for a bumpy ride ahead. The overall scattering of top performers each year highlights that opportunities are not limited to these 2 sectors though, hence approaching each sector with an open mind is imperative (aside from energy maybe).
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