Should you invest in the specialist sector?

Published by Rob Griffin on 20 September 2010.
Last updated on 25 August 2011

It's easy to be seduced by the specialist sector. At first glance it has been the stand-out performer over the past decade, with the average fund in the sector having returned a bumper 214%, despite the global financial problems.

This result is comfortably ahead of both the 132.6% achieved by the Asia Pacific (excluding Japan) sector and the modest 20% recorded by the UK all companies sector over the same period, according to figures Morningstar compiled.

However, the specialist sector contains a diverse array of funds and not all have enjoyed the same success: there's a staggering difference between the best and worst performers – and those at the bottom end have lost huge sums.

While canny investors who put £1,000 into BlackRock's Gold and General fund back in July 2000 have made eight times their money, those who opted for Franklin Biotechnology have lost almost £250.

A mixed bag

In many ways, the Specialist sector is like a cupboard under the stairs. Alongside useful items such as shoes and an ironing board will be unwanted Christmas presents, an assortment of vases, and maybe some old Easter chocolates.

Analysis of its constituent funds shows they are focused on a wide variety of areas including global infrastructure, agriculture, Latin America, resources, Russia, corporate debt, Europe, India, commodities, China and the emerging Middle East.

Nowhere else will you find a collection of funds thrown together that have such totally different investment objectives and performance targets. This means choosing what to buy is even more difficult as it's impossible to make meaningful comparisons.

Such a list illustrates why the sector must come with a 'buyer beware' tag, says Justin Modray, director of website It is always advisable to analyse a fund before buying it, but particularly so in this case.

"Specialist sector funds range from absolute return to emerging markets, natural resources, financials and healthcare, so it's vital you understand exactly what you're buying, along with the risks involved," he says.

Funds will be influenced by different factors and must be viewed on their own merits. During periods when Latin America is doing well, for example, property shares could be in freefall, while Russia could be stagnant.

The economic situation within regions, the health of their export markets, demand for certain products, political unrest or change of governments, and wider financial concerns can all make conditions tough – or favourable – for funds at any given time.

This is a point highlighted by the Investment Management Association, which defines the sector's constituents as funds that have an investment universe that is not accommodated by the mainstream sectors.

Performance ranking of funds within the sector as a whole is inappropriate, the IMA adds, given the diverse nature of its constituent funds.

Who would benefit from this sector?

Well, it's not for the cautious, says financial adviser Geoff Penrice at Honister Partners. "Specialist funds tend to have high volatility, so they might suit higher-risk investors who are not put off by a bit of a rollercoaster ride. They would usually form part of a diversified portfolio for investors with a core/satellite approach."

For example, an investor might want most of their money in UK companies while at the same time looking to enhance returns through exposure to other assets. Specialist funds, says Penrice, are likely to meet this 'satellite' definition.

It also provides investors with exposure to certain assets or regions, adds Modray. "If you have a plain vanilla portfolio, the Specialist sector is a good place to look if you want to spice it up, due to the interesting range of funds on offer."

So the decision whether or not to buy a specialist fund depends on your financial outlook. For example, Andy Gadd, head of research at Lighthouse Group, is upbeat about the prospects for commodities.

"Commodities have historically demonstrated returns that are negatively correlated with returns of stocks and bonds, and positively correlated with inflation measures," Gadd explains.

"This implies that an allocation to a range of commodities in a diversified equity and bond portfolio can improve the risk and return characteristics."

He highlights the Junior Oils Trust as a potentially interesting holding, given its focus on providing long-term capital growth from a global portfolio of small-to-medium capitalisation companies specialising in oil exploration and production.

"Ultimately, with increasing world industrialisation and growth on a positive trend again oil is potentially a good play on this," he explains.

Penrice agrees that areas such as commodities and natural resources – as well as health and energy – are likely to enjoy a spike in demand as a result of changes in the global landscape.

"Economic growth is definitely moving towards developing economies such as China, India and Brazil," he adds.

All in all, the performance tables have illustrated that an investment within the Specialist sector can deliver results – but only for those who do their homework. The potential rewards may be higher but the risks are as well, so investors must tread very carefully.

Consider investing in the sector if...

• You're looking for exposure to certain assets or regions;
• You want to add some satellite positions to your core holdings;
• And/or you're keen to diversify. your portfolio.

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