By Pascal Dowling The diverse nature of the funds in the specialist sector has produced a mixed r...
By Pascal Dowling
The diverse nature of the funds in the specialist sector has produced a mixed reaction to turbulent global markets.
Falling interest rates have put financials in a strong position since the Fed first cut rates after Christmas, whereas technology funds in the same sector have been badly affected by negative market sentiment.
David McCraw, manager of the Edinburgh Financial fund, said current market conditions were the flip side of last year's technology boom.
He said: "This time last year, financial stocks were dead dogs, nobody was interested in fuddy-duddy old financial companies.
"Since technology took a nose dive last March, the same investors are mysteriously interested in those rather attractive financial stocks. Perhaps there is something quite nice about that dependable, defensive position they have."
Edinburgh Financial has a beta of 0.54% against a sector average of 0.92% for the three years to 9 March 2001, suggesting a fairly steady performance. McCraw believes the portfolio has made good use of strong performances from subsectors in the financial field.
He said: "Merchant banks and investment houses performed well last year, financial markets were busy and there was a high level of merger and acquisition activity."
This sector has cooled off somewhat now, but falling interest rates mean retail banks are performing well and should take up the slack.
The fund is ranked 15 out of 27 in the specialist sector for the three years to 7 March 2001, a better performance over one year ranks it six out of 42 funds in the sector.
McCraw believes sentiment in global markets, which is poor, is an ideal climate for making money. He said: "The more negative sentiment becomes, the easier it gets to make a lot of money. If there is a recovery in the US market, which should take the dampers off global sentiment, I expect to do very well."
McCraw expects another cut in interest rates to take place soon, adding further stimulus to the global economy. Edinburgh Financial is positioned in an accordingly aggressive manner, although McCraw is limited in the weightings he can take.
Retail banks, prime beneficiaries of interest rate cuts, make up 50% of the portfolio, McCraw also believes there is still potential in the fund management and investment banking industries and specialist finance makes up 35% of the portfolio.
Biotechnology, also a feature of the eclectic specialist sector, has suffered the side-effects of last year's technology fall out.
Antony Milford, fund manager of the Framlington Health fund, said: "The technology bubble last year was really an internet bubble, it really should not have affected biotechnology to any great extent.
"However, one tends to find investors in the biotech sector are the same people who are buying internet shares, naturally enough they are feeling pretty cautious at the moment."
Milford believes fundamentals of the biotechnology sector make it less susceptible to more general technology trends. He said: "These are companies which are focused on a core product, a tangible one too, which can take a long time to incubate.
"They have usually raised a great deal of money and have quite large capital reserves because, unlike internet companies, they do not need to invest everything all at once, a lot of what they do is research related, therefore longer term."
The fund has a beta of 1.09%, above the sector average of 0.92% for the three years to 9 March 2001.
Milford said the aftermath of the technology blowout was behind this volatility. He said: "The correction in March did not impact immediately on the biotech sector, the slide began in November 2000 and effectively repeated what had gone on in the technology collapse."
According to Milford, valuations became very unstable without any real change in the fundamentals behind them.
Milford believes this year should be crucial in stabilising the sector. He said: "There are lots of launches planned this year which include things such as cancer drugs and asthma treatments, areas in which there is massive potential interest.
"A number of biotech firms will also be making their first profit this year and hopefully this will increase investor confidence in what is a massively promising area."
Framlington Health fund is ranked four out of 27 funds in the specialist sector for the three years to 7 March 2001. Milford believes this strong performance is likely to continue despite economic uncertainty.
He said: "The demand for healthcare is indifferent to market conditions, people will always get sick, and treatments will always be in demand.
"The fact that the outlook is somewhat uncertain could even be seen as a positive for this relatively defensive sector."
Simon Melluish, manager of the Gartmore Global Utilities fund, attributes the steady performance of his portfolio to the freedom provided for by its mandate.
The fund has a below average beta of 0.61% for the three years to 9 March 2001. Melluish said: "When telecoms were performing strongly last year, this provided a strong driver for the fund's performance. However, these have suffered profoundly since they reached a peak between June and October."
At this point, Melluish pulled out of his commitment to telecoms, dropping his exposure from 70% to its current level of about 50%.
He has since invested in electricity which has been performing strongly since March. He said: "Electricity suppliers are still performing strongly, however, I am also starting to re-build my position in telecoms where I believe valuations have been dropped to an attractive level."
According to Melluish, fund managers in the utilities sector should be prepared to trade actively.
He said: "At the moment, while I am far from bearish, I think times are quite tricky because there is very little visibility in terms of future trends.
"The market needs to reach a point where lowered expectations have been fully priced in and profit warnings are no longer a regular event, telecoms need to overcome the uncertainty caused by their debt levels and the furore over third generation licenses.
"If this happens, I think it will be the end of 2001 before any clear indications begin to show."
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