In common with many equity funds, those in themed sectors have had a difficult year, characterised b...
In common with many equity funds, those in themed sectors have had a difficult year, characterised by a prevailing bear market and continuing lack of positive investor sentiment. Often these funds are popular with investors who are already geographically diversified, but who may be looking for more industrially-focused investments. In contrast to geographically-focused sectors, funds in specialised sectors such as those outlined below, may find they have a more limited universe of stocks to invest in, with the result that fund performances can be adversely affected. In fact, many specialised funds are not faring as badly as observers have predicted, but performance will probably continue to be affected by any continuation of the current malaise in global equity markets.
Although losses are not as significant as they have been in the past, funds in the TMT Global sector have largely still not recovered from the burst of the TMT bubble ' all funds in this sector saw negative returns over the last year. In our recent report on specialist sectors, we noted that 'when technology funds fall, two years of bitter disappointment adds a dangerous momentum to a downturn that makes few concessions for company fundamentals.' With average losses of 31.52%, performances of funds within the sector have varied widely ' there are almost 60 percentage points between the leading and lagging funds. With 210 funds in the sector perhaps this variation in returns is not so surprising, but TMT fund performances do tend to show a similar variance in volatility.
Since average volatility in the sector is as high as 12.8, calculated over three years, investors would pay to show extra diligence when researching global TMT funds to ensure that they are not taking more risk than they intend.
Healthcare is not a homogeneous sector ' funds have exposure to a variety of areas such as healthcare companies, hospital service providers and medical equipment manufacturers with the result that no two portfolios are alike. The average healthcare fund investing globally has lost 21.96% in the last year. However, returns within the sector were fairly varied, so that although the leading fund returned -7.6%, the worst performing fund lost 39.6%.
It is likely that stock picking was a key determinant of performance. Average volatility in the sector was not high, but the riskiness of the funds within the sector was fairly varied. However, the average volatility figure was slightly distorted by the most volatile fund which, with a figure of 13.9 over three years, was considerably higher than that of the next risky fund at 8.5. Of the 70 funds in this sector, 43 have been launched since the beginning of this century, although this slowed down to only six being launched in 2002.
Biotechnology funds, often considered a sub-set of healthcare funds, have had a much more difficult year, with average losses of 39.31%. The leading fund lost 10.2%, with the next best losing more than eight percentage points more. The Standard & Poor's Specialist sector overview noted: 'Mid and small-cap biotechnology stocks became entangled with the global downturn in anything vaguely technology-related.' Not only was this one of the worst performing Standard & Poor's offshore sectors in the last year, it was also one of the most volatile, probably in part due to its highly-focused nature.
While other specialist sectors benefit from having a larger number of companies to invest in, there are few pure biotechnology plays globally. The least risky fund in the sector had a volatility figure of 9.24 over three years, but most funds had a level considerably higher than this. The riskiest fund had a volatility of 17.56 although it lost 37.97% during the last year ' as is often the case in current markets, higher risk does not always follow through into higher returns.
Although this sector has not fared as badly as most of the other specialist sectors, global finance funds have still largely failed to achieve positive returns. Only one fund bucked the negative trend, returning only 1.6% over the last year. Financial companies are often seen as defensive plays in bear markets, but although this has not completely mitigated the continued difficulties that are characteristic of global equity markets, it has reduced losses compared with other global specialised sectors.
The worst performing fund in the global finance sector lost 19.4%, but in four of the other specialist sectors, even the average fund lost more than this. Funds within the sector are not excessively risky compared with other equity-based investments, but they do all tend to have a very similar level of volatility, probably indicating that global finance funds tend to be highly similar in terms of investment objectives or strategies.
We define ecology funds as being those funds investing in companies adhering to policies designed to support or actively improve ecological issues. For the most part, funds in the ecology sector have found good returns elusive, and only two funds had performances better than -10%.
Although not a large sector, fund performances varied by around 20% on both sides of the average return ' this difference may be in part to diversity in criteria that ecological funds may adhere to, although it does tend to be a common theme in equity-based investments currently. Volatility within the sector is quite varied ' with a range of 6.52 between the least and most risky fund. In fact, the least risky fund in the sector was ranked second in terms of performance ' certainly a desirable outcome from the investor's point of view.
Although often considered in conjunction with ecology funds, ethical funds vary slightly in that they invest in companies involved in enhancing standards of living for example healthcare, long term care, diet, education, leisure and excluding investments in such areas as armaments, nuclear processing, alcohol and tobacco, animal experiment, gambling and pornography.
However, as with ecology funds, they may vary in terms of the screening processes that are used to identify ethical funds.
This is a small sector with only 10 funds in it, and none is bigger than $83m in size. The average sector performance was -17.1%, although the leading fund outperformed its nearest rival by over 13 percentage points. This fund achieved these returns at a much lower level of volatility than that of its peers ' although none of the funds had a significantly higher level of riskiness than would be usually expected from an equity fund.
Gold and Precious Metals
This small sector has been the one beacon of light among the specialist sectors, with average performance of 51.5% over the last year. This was the second-best performing sector in the whole offshore fund universe. Funds in this sector benefited from non-correlation to equity-based investments, with the result they were therefore insulated from the lengthening equity bear market.
In a sector of only nine funds, all achieved positive returns during the last year, although performances varied widely from the average with a range between the best and worst performing fund of almost 70 percentage points.
The fund which ranked lowest in the sector lagged the next best by around 32 percentage points ' every other fund achieved returns in excess of 40%. The sector is fairly volatile, with the majority of funds showing three-year volatility of between 8.5 and 10.5.
Another defensive play which in this case does not appear to have paid off, funds in the utilities sector have had a difficult year with average losses of 20.8%. This mean performance actually benefited from the returns of the leading fund which was over 10 percentage points better than that of the second best fund. Indeed, of the 12 funds in the sector, nine did not achieve performances better than the average sector return, and performances of these nine funds were fairly similar, ranging from 21.8% to 26.6%.
The leading fund seemed to benefit from taking a higher level of volatility than that shown by other funds in the sector, although average riskiness in the sector may be distorted by the small number of funds in the sector that have existed for the three years required by the calculation.
During the last year, when the S&P Global index returned -13.77%, many offshore specialist sectors investing globally were characterised by even worse performances. Two exceptions were in the gold and precious metals and finance sector.
The former in particular had extremely robust returns and considerably outperformed the S&P Global index. Biotechnology funds were languishing near the bottom of mean offshore sector returns, followed closely by TMT, healthcare and utilities. It remains crucial for investors to assess specialist fund performance in conjunction with other information such as risk to ensure their investment objectives and diversification requirements will be met long term.
Louise Collins is media manager for Standard & Poor's
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