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Back to Africa

Specialist funds have drifted in and out of favour in recent years. Right now, the IMA’s statistics would show them out of favour, at least compared with the larger sectors such as corporate bonds and equity income.

But funds housed in the specialist sector are not just faddish investment choices, where buyers get caught up in the frenzy of a trend, such as property or commodities. Instead, it houses long-standing satellite investment themes that even in today’s difficult market are showing strong results.

Jupiter financial opportunities is one such portfolio. Despite its focus on one of the most troubled areas of the global investment market in the past year, it has maintained not only top performance in its sector but overall, with positive return over one year to 28 May, according to Trustnet figures. The company is one of the few portfolios in the entire unit trust/Oeic industry to have achieved such a result. Of course, it’s largely down to Jupiter’s manager, Philip Gibbs, not having invested in financials for some time – leading to the discussion that the portfolio doesn’t really live up to its brief, yet protecting assets in a falling market is the sole advantage to active fund management.

Active management and expertise is probably the most at home among the more specialist funds. It’s not an area where quasi-tracking or index-following excels or can compete effectively. The markets and assets invested in by this sector are specialist by nature and therefore require specialist expertise.

Those who invested in such funds during the height of their popularity may feel burnt more than those in chiefly mainstream sectors – but many of the funds have a proven record of surviving the downturns and continue to perform. There are those that haven’t, however, making fund selection in satellite areas that much more vital.

Africa was one such specialist area and has equally burnt many investors, particularly those who bought into the now-closed New Star heart of Africa fund. The reason investors piled into such an emerging market was its links to the commodities boom. Although some investors may have been disappointed with the performance of the region – it still has plenty to offer, especially as commodities regain their ground. In looking at the specialist sector over the past six months, it is commodity funds which have produced the best results. The Ruffer Baker Steel Gold portfolio has gained some 77 per cent in the six months to 28 May. There are seven natural resource or gold funds within the top 10 best performers in the IMA’s specialist sector over that period.

Stanlib’s standard Africa equity fund manager Stephane Bwakira says that despite the continued global market downturn, it is business as usual for Africa. “As 2009 rapidly approaches its halfway point, there’s a wealth of business being carried out in terms of energy, oil and gas production in the continent. The UK is playing a significant part in this widespread investment with UK-based Dana Petroleum, for example, investing $130m in Egypt to search for new oil reserves. Likewise, with a commodity synonymous with Africa, and after being suspended at the beginning of the year, diamond production is enjoying some renewed growth in 2009. De Beers is indicating that their sales have been steadily climbing for most of 2009.”

Bwakira is not alone in the belief that Africa still presents opportunities. Investec’s Africa team, unsurprisingly, also praises the region’s recovery and continued outlook. A spokesman says: “Though dragged down by the recession, we believe Africa’s positive macroecon-omic fundamentals remain intact, with GDP growth for 2009 expected to outpace developed markets.”

The Investec team blames global risk aversion and the pullout of foreign investors to the falls seen in African markets, not as a result of any overvalued share prices or because the economies, such as many Western ones, were heading into recession.

The few Africa funds that do exist for UK retail investors haven’t fared too badly in the past few months. Investec’s fund is up by 16 per cent over the past six months.

Other esoteric investment areas have also done considerably well in recent months – perhaps better than the mainstream regions and asset classes. UK corporate bonds remain the biggest-selling sector in the retail industry, with the IMA reporting that in April the sector represented 16 per cent of gross retail sales of UK domiciled funds, 90 per cent of those sales being via intermediaries.

On a net basis, the sterling corporate bond sector saw inflows of £683.7m in April while global emerging markets saw the biggest outflows at £243.1m. And yet in terms of performance, it has been emerging markets and the more satellite areas of investment which have fared the best.

Over the past six months, 16 of the top 20 best performers in the 2,000-plus open-ended universe of funds were either resources portfolios or invested in an emerging region. And the gains have not been small with JP Morgan’s natural resources fund rising more than 60 per cent over that period. Not one corporate bond fund is featured in the top 20. M&G, with gains of 12.5 per cent, is the best-performing corporate bond fund and is ranked 523.

While buying on the back of short-term performance is never a good idea, the point is that although investors may have kicked themselves for jumping on certain bandwagons last year, the longer-term story in these funds remains intact.

Emerging markets, commodities and even the more esoteric regions, such as Africa, have shown their resilience in recent months. Groups selling these products have never shied from the fact that the ride in these funds would not be smooth, they have simply espoused the long-term trend these regions and asset-classes hold.

Advisers always have a tough job in communicating to investors when they have lost money in funds outside the normal UK equity market. The recent strong performance in emer-ging markets and commodities, however, should go some way to reinforce the fact that the invest- ment message has not been lost.

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