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Cool and unusual

Specialist, sector-based and somewhat esoteric funds appear to be the themes in the UK retail investment industry at the moment, with product launches covering Africa, infrastructure, agri-culture as well as climate change.

It is not out of the ordinary to see a few unusual funds launched at any time. For example, a few years ago, Pictet put a water fund on offer. Sector-based funds are hardly new and it was not long ago that the industry was rife with healthcare and technology funds. However, what seems odd is the large number of such funds being launched in a variety of areas at present. One Africa fund may seem unusual but four so close together starts to smack of a marketing opportunity rather than an investment one and there has not been just one climate change launch.

But is it fair to brand these funds automatically as the marketing trend of the moment? After all, gold, Eastern Europe, Hong Kong and China were considered unusual once upon a time. Generally, there are concerns about marketing gimmicks when there are suddenly 20 to 30 such funds on offer rather than a handful, even if they seem to be coming to the market at the same time.

What are advisers or investors doing with such a new and perhaps interesting range of funds being offered to them? Are they worth looking at? Professional fund buyers appear to be saying yes although they add a note of caution.

Ben Yearsley of Hargreaves Lansdown and Darius McDermott of Chelsea Financial Services both buy into the longer-term story backing some of these new products, as do fund of fund managers Gary Potter of Thames River and Chris Ralph of Maia Capital, but all are also a tad wary at the same time.

Potter notes that if you break these funds down, they are actually all tied to the same theme – commodities – and that is a story he does not see going away any time soon.

Africa is rich in comm-odities such as oil and Potter points out that oil imports into the US from Africa surpassed those from the Middle East in 2006, with Nigeria, Angola and Algeria accounting for 19 per cent of oil imports compared with 14 per cent from Saudi Arabia.

It could be said that the Africa theme, and hence the fund launches, exploit the rising price of commodities and metals but Ralph says it could be argued that Africa is one of the last truly emerging markets.

Potter says an Africa fund today probably looks as specialist as a Hong Kong and China fund would have 10 years ago.

The climate change theme is also linked to what has been happening in commodities but McDermott sees this story as slightly deeper due to the global political will that is backing change in this area. That is not to say that there is not some caution when looking at these funds. For one, many of these types of portfolio invest in quite new technologies.

Potter says managers in this area could easily lose sight of the fundamentals driving the businesses, similar to what happened with the tech frenzy.

“Not all these businesses will work,” he says, questioning whether it is even worth getting such concentrated exposure to the climate change theme through a specialist fund. If the theme is dominant enough and backed by good fundamentals, then any good growth manager will end up exposed to these types of companies, he says.

Ralph says these sectors are interesting but many of them need to mature.

McDermott says: “You have to trust the story.” That can be difficult to do, particularly when hype can get in the way.

“This week alone, I have commented on four separate pieces being written on oil and gold and part of me starts to worry that when everyone is writing about it, the party may already be over. Still, while I think that areas such as emerging markets may continue to be volatile, I also think there is a good long-term growth story there.”

Believing in the investment story is just one thing and there are a number of other factors that investors need to consider as part of these new opportunities. “You have to take each fund on its own merit,” says McDermott.

For example, there may only be a handful of Africa funds available but already there are huge variances in the way they are structured and managed, with one portfolio heavily skewed to South Africa while another avoids it altogether.

Looking at climate change, some portfolios use that specific title while some follow a green theme and others go by more environmental fund names. It appears they should all fall into the same camp but they do not. Just as not all environmental funds are ethical, not all funds invested in climate change issues are environmental.

Another key component to consider when looking for exposure to a perhaps more esoteric investment arena is just how long is the product provider going to back this story?

In the 1980s, there were a number of technology funds but by the late 1990s there were a mere three with any substantial track record as most had already been closed. Dozens were then launched heading into 2000 and now there are just 13 left in the tech and telecom sector.

Tech is not the only example of this lack of commitment, as emerging markets, Latin America and property vehicles have all experienced similar fates – huge fund launches, quiet closures, only to come back into fashion and run through the cycle all over again.

It is not a mere whim that tends to cause groups to open and close funds. The size of the portfolio will often dictate whether it will be around in a few years time.

Patience from the investor is required when looking at such sectors.

Biotech was a nice story in the 1990s and an easy one to buy into, considering the ageing demographics and patent expiry issue faced by big pharmaceuticals, but what seemed a racy and exciting area has done very little in the past five years.

There may be no denying that issues like climate change will be vital but there is also no clear map as to when the companies linked to this theme will actually benefit.

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