Specialist funds have defied their high-risk reputation to be one of the most stable sectors over the last 10 years, despite not having produced the stellar returns of technology and telecoms
With specialist funds pummelled by plunging stock markets and risk-averse consumer sentiment, their future does not look bright. However, certain sectors are starting to show some encouraging signs of revival and now could be the time to invest in specialist funds
Fund managers are faced with a dilemma. Ten years of sustained US and UK economic growth, stable inflation and rising markets have left investors with higher expectations of what returns they can expect from their investments. But depressed markets and world events have made it difficult to achieve these returns, forcing managers to look to more aggressive strategies.
This means managers will have to take higher risk strategies to seek stronger returns at a time when consumers are seeking safer, lower-risk investments.
Nonetheless, many managers are taking the more aggressive route and trying to beat the markets. This can be seen by the launch of numerous focus funds, which have proved remarkably successful and have been among the top performers over the past couple of months.
So this begs the question as to whether specialist funds, one of the more traditional aggressive fund categories, look to be a strong investment option at present?
Specialist funds invest solely in one particular sector of investment, asset type or geographic region or country. They are designed mainly for experienced investors who either have access to investment expertise or wish to use their own financial judgement for investment decisions. Specialist funds provide potential for very impressive growth and are therefore more suited to investors seeking a high risk/reward option.
The graph below shows cumulative performance of some of the slightly longer running specialist funds for £1,000 invested over one, two, three and five years (dates to 1 February 2002).
In a similar fashion to the majority of investment funds, specialist portfolios were hit by the plunging stock market in 2001. Looking at the past performance figures, the following trends can be observed. It appears that most of the Korean funds have fully recovered, resulting in them becoming some of the leading funds in the sector over the past 12 months. Korea's stock markets were falling before September 2001, however, and were affected severely by the global fall on 11 September. The Korean market experienced a dramatic rally in the fourth quarter of 2001 and careful restructuring of holdings by some fund managers has resulted in outstanding results.
Merrill Lynch Gold & General fund is ranked top in the sector over the past 12 months. The theme of the fund is investing in gold mining and precious metal-related shares. It was probably least affected by the 11 September events.
With the exception of the Framlington Health fund, all healthcare funds are relatively new and past performance is insufficient for an effective comparison. The Framlington Health fund showed strong signs of recovery in the fourth quarter of 2001, mainly because of the to strong recovery of biotech funds.
Financial funds were hit hard as a result of September events. Funds that were overweight in the insurance sector suffered for some time after the US terrorist attacks, as investors backed down in fear of rising insurance premiums. The last quarter of 2001 was positive for financial funds. Global cutting in interest rates especially in the US, the UK and Europe encouraged investors with good growth prospects in the immediate future.
Looking at the historic past performance figures of specialist funds, even before the US terrorist attacks, it can be noted that most funds have large fluctuations and high volatility. It is relatively common for most specialist funds to have cycles of good and bad performance.
However, there is firm evidence to suggest that they are still not as high risk or volatile as some of the Smaller Companies or Technology funds.
With most sectors starting to show encouraging signs of revival, future prospects for specialist funds look optimistic. With this in mind, now might be a good time to invest in specialist funds. But should any such investment be on a short- or medium-term basis?
There are certain funds in the specialist sector that are looking particularly attractive at present, although it must be stressed that not all sector funds are looking that strong.
The short term prospects for the Korean funds in the specialist sector look particularly healthy. Economic and earnings prospects continue to improve and are expected to pick up throughout the year. Additionally, an improving exports industry in information technology and other products should also boost the growth in this sector. Korean funds are expected to maintain this aggressive stance and short-term prospects look extremely good.
The MLIM Gold & General fund is looking good in both the short and medium term but it is a fund with a unique theme and is ideally suited for investors diversifying a larger portfolio.
Even without looking at past performance, it is certain that the healthcare sector is positioned uniquely in the market and should be considered as a relatively stable investment. Healthcare and medicines are essentials rather than commodities and the need for these products is constant and independent of global or geographic economic conditions.
In addition, new medical discoveries and techniques are extremely profitable and, together with an ageing population demographic, the requirement for medicines is increasing with time. This is likely to result in healthcare remaining one of the fastest growing global industries. Consequently, healthcare funds offer good growth potential in both the short and medium term.
The financial funds are not looking as strong as other specialist sectors due to recent market conditions, although there are suspicions that the negativity has been overdone.
Investors remain cautious about current low interest rates and how interest rates will rise remains an unknown factor.
However, an ageing population, combined with the rise in the standard of living and less dependence on the Government, has created an increasing demand for savings and investment products. More transactions are being made through the internet than ever before and the potential for growth within this sector remains good, especially over the medium and long term.
Specialist funds are looking a viable investment option at present, but as long as this is done with careful planning and regular monitoring thereafter.
Each portfolio investing in specialist funds should be diversified making sure it has a balance of relatively stable funds with good opportunities for growth over the long term (healthcare funds and financials) and short term opportunities for boosting the growth of investments (Korean funds).
Moreover, it is fair to say that specialist funds have defied their reputation as aggressive, high-risk funds to be one of the most stable sectors over the last ten years. Although they may not have produced the stratospheric long-term returns enjoyed by technology and telecoms, and despite a level of volatility akin to the poor performing Japanese markets, they have emerged as one of the best performing sectors.
Indeed, when investors seek the high level of returns they are accustomed to receiving in the heady days of the 1980s and 1990s, it may well be that specialist funds are one of the few investments that will be able to deliver.
Specialist funds invest solely in one particular sector of investment, asset type or geographical reason.
Korean funds have been among the leading performers in the specialist sector over the last year.
Need for healthcare products in constant and independent of global economic conditions.
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