Even if you’ve got an ultra-long-term time horizon, it’s still advisable to keep the bulk of your money in core funds allocate only a small portion of your assets to specialist portfolios. The chances of 50, 60 or even 70 per cent losses are much higher in specialist areas, as tech investors in the early 2000s know only too well.
As well as being volatile, funds that focus on under researched sectors tend to be more expensive, though there are some cheap options out there for those willing to look hard enough.
Gold equities
While thoroughly unloved in recent years, gold equities have been very strong performers this year, with the seven funds focused in this area dominating the performance charts in 2014.
BlackRock Gold & General has tended to be the go-to option for investors in recent years, but with clean ongoing charges of well over 1 per cent, it's more expensive than the average equity fund.
One much cheaper option is the £57m Investec Global Gold fund, headed up by FE Alpha Manager Bradley George and Scott Winship. It has ongoing charges of 0.87 per cent – competitive even for a core equity fund.
It is highly rated by Rob Gleeson and his FE Research team, who include it in the coveted FE Select 100 list.
They point out much of the Investec team are based in South Africa which gives them an inside track on many of the companies they’re invested in.
Like all gold funds it’s had a terrible time in recent years, though has lost less than its Euromoney Global Gold benchmark over three and five year periods. George has made 18.59 per cent so far this year – a touch less than the index.
Performance of fund and index over 5yrs
Source: FE Analytics
While gold equity performance has been much improved, Simona Gambarini, associate director of research at ETF Securities, believes the rally is set to continue.
“With gold mining stocks trading at a 58 per cent discount to 2011 levels, gold miners’ shares remain highly undervalued relative to fundamentals in our view,” he said.
“Although reserve depletion is an issue that still needs to be addressed for sustainable long-term growth of the sector, cost management has substantially improved miners’ profitability.”
“With global growth finally starting to gain momentum and seasonality of gold demand historically buoying gold miners’ shares in the third quarter, we believe now may be a good time to raise exposure to gold miners.”
Chinese equities
Single country emerging market funds are among the most expensive in the IMA universe, with figures upwards of 1.5 per cent even for clean share classes common place.
One of the cheaper options on offers is the Invesco Perpetual Hong Kong & China fund, which levies charges of 0.94 per cent.
As the fund’s name suggests, managers Lorraine Kuo and Mike Shiao have a bias towards Hong Kong companies, which currently have a 54 per cent weighting in the portfolio. Companies listed here tend to have better corporate governance than those in mainland China and often cope better in market downturns.
Indeed, the fund has coped better during the turbulence market conditions of recent years, and is ahead of its sector over the short-, medium- and long-term.
Performance of fund and sector over 3yrs
Source: FE Analytics
Invesco Perpetual Hong Kong & China is a favorite with Equilibrium’s Mike Deverell, who holds the five-crown rated fund in his personal pension portfolio.
Healthcare
Pharmaceutical stocks are very popular with fund managers at present, with companies such as AstraZeneca, GlaxoSmithKline and Roche staples for a number of portfolios.
One fund that focuses specifically on this sector is Schroder Global Healthcare. With ongoing charges of 0.92 per cent, it is one of the cheaper funds that focuses on healthcare, and has a very strong performance record to match.
According to FE data, the £140m fund is a top quartile performer in its IMA Global sector over one, three, five and 10 year periods. It has returned more than 110 per cent over five years, compared to 61.39 per cent from the average Global fund.
John Bowler, who took over in 2004, has a strong bias towards US companies, which makes up around two thirds of the portfolio. He invests predominantly in large caps, but has the flexibility to go down the market cap scale when he sees opportunities.
Financials
Manager of the M&G Episode Growth fund Eric Lonergan recently told FE Trustnet that the two obvious value plays in the equity market are financials and the European periphery.
One fund that currently has a bias towards both of these areas is Paul Causer (pictured) and Paul Read’s Invesco Perpetual Global Financial Capital fund. The managers were quick to jump on battered valuations in countries such as Spain and Portugal in 2011 and 2012 and have benefited as a result, and still retain some exposure to the region.
Invesco Perpetual Global Financial Capital targets a combination of growth and income, by investing in financials-related equities and bonds. Debt makes up the bulk of the portfolio, with equities currently making up 15 per cent of assets.
Performance of fund and index since launch
Source: FE Analytics
As well as consistently generating a yield of over 5 per cent, the fund has performed very strong since its launch in January 2012, picking up over 67 per cent. The fund doesn’t have a benchmark, but as a point of comparison, the MSCI AC World index has made 29.5 per cent.
Invesco Perpetual Global Financial Capital typically has ongoing charges of 1.2 per cent, but is as cheap as 0.8 per cent on certain platforms.
Technology
The tech bust in 2000 is still fresh in the memory of some investors, though the sector has performed very strongly in recent years. Experts point out that tech is a far larger market and therefore more resilient these days, with some recommending investors up their exposure.
The £207m AXA Framlington Global Technology fund is one of the most popular choices, and with ongoing charges of just 0.84 per cent, is cheaper than many run-of-the-mill equity funds.
Headed up by Jeremy Gleeson, the fund is a favourite with Chelsea Financial’s Darius McDermott, who bought it for his own ISA portfolio earlier this year.
McDermott believes that tech is one of the few sectors in the developed market with attractive valuations, and likes the AXA fund’s focus on finding the cheapest companies on offer.
Gleeson has a strong long-term record, beating the IMA Technology & Telecoms sector average over five and 10 year periods with returns of 102.75 and 212.58 per cent, respectively. He has slipped behind his sector over three years, though has a strong 2014.
FE Trustnet looked at cheap core and diversifying funds in two previous articles. In an upcoming article, we will look at cheap one-stop-shop funds across the mixed investment and global sectors.
