Fund Briefing: How to invest in the specialist sector

11 July 2018

Investors looking for something different may find themselves drawn to the IA (Investment Association) specialist sector, which consists of funds that simply don’t fit anywhere else

This fascinating area contains a mix of funds and strategies, according to Darius McDermott, managing director of research ratings agency Fund Calibre.

“From Korean equity funds to those investing in gold, agriculture, Chinese currency fixed income, US mortgage-backed securities, or healthcare – anything goes,” he says.

It’s a fair point. Analysis of the sector’s constituents reveals funds focused on a huge variety of unrelated areas and with totally different investment objectives.

You’ll find global infrastructure funds sitting alongside those specialising in agriculture, Latin America, resources, Russia, corporate debt, Europe, India and commodities.

This vast spread makes it virtually impossible to compare funds on a like-for-like basis – a fact that’s acknowledged by the IA.

“Performance ranking of funds within the sector as a whole is inappropriate, given the diverse nature of its constituents,” it states.

The main benefit of the IA specialist sector is that it can give investors exposure to very specific themes, according to Gavin Haynes, managing director of investment management firm Whitechurch Securities.

“This may be an individual sector or a niche investment market,” he says. “It is a great way to add satellite holdings to core investment themes and increase diversification.”

There’s certainly plenty of choice. With more than 200 available funds, including some hidden gems of more esoteric investment themes, there are opportunities for exciting growth prospects.

Mr Haynes also points out that the number of funds in the sector has increased significantly over the last few years, due to increasing demand from more sophisticated investors.

“Active fund management houses are also needing to come up with more ingenious ideas for investment themes to attract investors,” he says.

To illustrate the point, he highlights the wide range of individual emerging markets that could be of interest to longer-term investors.

“Some individual sectors also look appealing, such as financials and healthcare, while the high oil price means energy sector exposure is worth considering,” he adds.

“With more than 200 funds, there are some exciting growth prospects”

Mr Haynes cites the Polar Capital Healthcare Opportunities fund as an example, pointing out how its managers, Gareth Powell and Daniel Mahoney, have built a strong track record since 2007.

“Although healthcare stocks have underperformed recently, with an ageing population it is a strong long-term growth theme,” he explains.

UK investors currently have £55.4 billion in IA specialist, although the sector was the worst in terms of retail sales in the last quarter of 2017 and the first of 2018.

Adrian Lowcock, investment director at multi-manager Architas, attributes this lack of enthusiasm to the volatile nature of the asset classes that can be found within specialist.

In particular, he points out that oil and commodity funds have been doing well in recent months, while Russia-focused funds have suffered. 

“Given markets have become more volatile and the outlook less confident, investors are arguably avoiding specialist calls because they are more volatile, and looking instead for diversification and protection,” he says.

It’s true that many of the funds within IA specialist can be affected by problems such as political unrest and the health of individual export markets.

This means they can be risky and not suitable for everyone, warns Patrick Connolly, a certified financial planner with advisory firm Chase de Vere.

“While these have the potential to produce stellar returns, the flipside is that they can also be hugely volatile and leave investors with significant losses,” he explains.

As a result, it’s not unusual for such funds to be sitting at either the top or bottom end of the performance tables.

“Over the past year, the top-performing fund in the sector has produced a positive return of 26%, while the worst fund has lost 17%,” Mr Connolly says.

The difference over longer time periods is even more marked. “Over three years the best has made 74%, while the worst has lost 17%, and over five years the top fund has gone up 128%, while the bottom fund has lost 43%,” he adds.

Mr Connolly insists that the performance data illustrates that investors must be aware of the potential risks they are taking by investing too heavily in such portfolios.

“Each of the funds should be analysed individually and compared against a relevant benchmark, depending on where the fund invests and what it is trying to achieve,” he says.

Mr Connolly adds that large exposures should only be considered by higher-risk investors and suggests there are viable alternatives for those who are rather less gung-ho.

“You can get exposure to specialist areas through broad-based investments, such as diversified equity funds that include areas such as healthcare, financials, energy and technology.”

Fund to watch: Jupiter Emerging European Opportunities

The aim of this fund, celebrating its 16th anniversary, is long-term capital growth through investment primarily in central and eastern Europe.

Colin Croft, who was co-manager before taking the helm in 2014, looks to identify situations where a company’s earnings potential is unrecognised. This may be due to management actions, developments in the business sector or long-term structural shifts that result from technological or sociological change.

The investment style is not constrained by fixed sector and country allocations, with Mr Croft making decisions after meetings with companies as well as their suppliers and competitors.

At present, the fund’s largest geographical exposure is to Russia (48.1%), followed by Poland (16.1%) and Turkey (14.6%).

Financials accounts for the largest sector allocation (38.2%), followed by oil and gas (34.4%), with other areas, including basic materials and consumer goods, all with less than 10% each.

As for individual stocks, Lukoil, the Russian energy company, is the fund’s largest holding, with 9.6% of assets under management.

Gavin Haynes, managing director at Whitechurch Securities, suggests it’s an interesting recovery play that’s suitable for contrarian investors with a higher tolerance for risk. “It has a focus towards Russia and Turkey, which are two of the most out of favour emerging markets, but fund manager Colin Croft is a shrewd stock picker,” he says.

Value of £100 invested in the fund over five years

Fund percentage movement in year (%)-2.95-28.1-5.3256.9912.18
Value of £100* (£)97.0569.7866.06103.71116.35

*£100 invested on 1 January 2013. Source: FE, 5 June 2018.

ManagerColin Croft
Launch date16 September 2002
Total fund size£101 million
Minimum initial investment£500
Minimum top-up investment£250
Intitial charge0%
Ongoing charge2%
Performance feeNone
Contact details for retail investors0800 561 4000

ROB GRIFFIN writes for the Independent, Sunday Telegraph and Daily Express

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