So, we actually have another question from the live room. It’s from an anonymous attendee and they asked, “The energy sector has performed best in 2022. Will that continue? For the remainder of the year, which sectors do you feel will perform well?”
Yeah, I’ll start off to answer that. There’s a whole body of research on this question which is really related to the idea of: Are there these gurus or geniuses who can predict which sectors of the market will outperform? So, you can overweight those and either underweight or avoid the underperforming asset classes. That’s the whole idea of what’s called active management as opposed to more “passive strategies” like index funds that basically buy and hold all of the sectors in their market cap waiting. And the evidence is overwhelming that while it’s possible to win the game of active management, the odds of doing so are so poor, that it is foolish to try.
Today, less than 2% of active managers are generating what it is called “statistically significant alpha,” even before taxes are considered and after taxes, it’s about 1%. So, I think it’s important that people think about that because I don’t think anyone would want to play a game where the odds of them winning are 1 in 50 before taxes or 1 in 100 after. Whether the energy sector will outperform or not depends upon what happens, of course, to energy prices. And there aren’t any gurus who can tell us that from here. Remember, prices are already well elevated because of the invasion.
And now, there are certainly a wide range of potential outcomes. First, of course, the war could drag on a very long time and energy prices could go up further or maybe tomorrow, there’s a negotiated peace agreement, and energy prices will literally collapse. I don’t think there’s a person on planet who can tell you which of those scenarios is the most likely. Therefore, you should avoid trying to pick which sectors will do well when, because there’s no evidence that there’s anybody literally who has that ability.
So, we don’t try to do that at all in our portfolios for our clients. There’s just no evidence to support that line of thinking.