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Variations on a theme

SD: Forthcoming launches may well remain focused upon the growth sectors of TMT although some European small company products could also vie for attention.

GH: As technology was such a success in the first quarter of this year from a product provider&#39s perspective, I expect they will be considering their next theme-selling product. I would expect more funds such as Framlington&#39s New Leaders fund or more themed funds along the lines of healthcare, technology and biotechnology to help capitalise on the latest trends, which will, no doubt, be getting airtime in the national media.

Given the recent treatment of technology stocks, we will be very unlikely to see many purely technology-orientated funds being launched in the run-up to Christmas.

JD: I certainly expect to see more new funds investing in TMT stocks. Some investment groups will have had technology funds in the pipeline earlier this year just as the sell off in TMT stocks hit. Product development managers are likely to have put their plans on hold.

Now that the volatility has settled down a little they will be looking to roll out funds before the year-end. As well as TMT funds, other thematic or sectoral funds are likely to be launched. I also expect to see one or two new funds focusing on old economy companies that have excellent new economy prospects.

Are we to take seriously the idea of companies such as Fidelity to launch more sector funds in healthcare, industrials, financial services and consumer trends or is it just a marketing gimmick?

SD: Sector funds are the future. The ability to focus a portfolio increasingly in geographic or sector terms and yet still benefit from underlying stock diversification is a very powerful tool within private client portfolios. We believe sector and thematic funds will account for a large part of our exposure to collective funds within the next three years.

GH: Sector theme funds such as Fidelity&#39s are not really a gimmick at all. Going back over the years, we have seen many types of themed funds being launched.

My view is that if you get the sector right in a broad brush sense, then it does not really matter what the individual stocks do as the momentum of the sector tends to carry good and bad stocks along alike – although, of course, to varying degrees.

I think sector theme funds are here to stay and, for the right investor, they will play a major part in portfolio planning for the future.

JD: Thematic or sectoral investment is not just a gimmick. It is a sensible method of managing money, which enables a manager to focus on a key area of the global economy. An investor gets access to the top-performing sectors and benefits from a geographical spread. It is important that these types of funds are global, as regional funds would place too many constraints on the fund manager. It is widely accepted that companies are increasingly competing and operating globally.

At the turn of the year, equity income funds came back into favour after a year in the wilderness. Six months down the line, has their performance sustained?

SD: We believe the “value” income-based stocks have run out of steam. Fundamentally, the market still desperately wants to see earnings and sales growth from listed companies. The key premise being that, in a strong global economy, companies which cannot deliver growth are likely to fare even worse when the climate changes.

GH: Equity income funds tended to reach their nadir around the end of February. Indeed, from January 1, 2000 to March 1, 2000 – only two months – they fell by about 10.5 per cent. Since then, they have come racing back to make good the losses and the sector&#39s up nearly 10 per cent over the last four months.

This may be largely as a result of value stocks coming back into fashion at the cost of more technology-orientated stocks. As we have seen with the FT-SE 100 index being rebalanced and the knock-on effect down the line, their performance has stabilised and is likely to be more sustainable for the future.

JD: Overall, the UK equity income sector has posted fairly neutral returns so far this year. Fund prices fell in the first two months of the year when TMTs were doing well. Clearly, most funds were light on TMT stocks. Since then, they have recovered most of their lost ground as old-economy stocks have seen a return to favour.

Increasingly, UK equity income funds are being managed on a total-return basis. Many are finding ways to embrace TMTs despite the relatively low-dividend yields provided by these stocks.

Fund managers are optimistic on Mexico these days after recent elections and its expected rise to investment grade status from Moodys. What place do you think Latin American emerging market funds have in portfolios? Or would you opt for a global emerging markets fund in their place?

SD: Our rules of thumb when investing in emerging markets are as follows – funds should be region- or country-specific not generalist – emerging economies are incredibly disparate and do not move in the same direction at the same time.

Investments in these areas should be considered short-term not long-term – to make money, investors need to trade these markets not buy and hold. Watch the currency, these are generally not hard currency markets and even if your capital is increasing the currency could be going the other way.

GH: Latin American emerging markets are not quite a one-horse bet, but almost. For most investors, global emerging markets funds spread the risk across more countries and currencies than just Latin America.

JD: There is certainly a good case to look seriously at investing in Mexico.

A fund such as Threadneedle Latin America growth has around 53 per cent exposure to Mexico whereas the Mexican weighting in the ICFC Latin American index is around 38.5 per cent.

For most investors dipping a toe into emerging markets for the first time, I would recommend a global emerging markets fund.

However, a regional fund does have a place in the portfolios of some investors and Mexico is a country to watch.

What impact do you think the Government&#39s new Individual Pension Account wrappers will have on the market place? Will it help fund managers compete more effectively than they have in the past?

SD: We believe that the marketing appeal of a pension wrapper like the IRA in the US is very strong and fund managers will inevitably want a piece of the pie alongside their Isa products.

GH: The Government&#39s new Individual Pension Account could provide an ideal opportunity for investment groups to compete on a more even footing with the well established insurance companies in this market.

The trick is to get IFAs and private investors alike to buy the fact that a good asset manager is a good asset manager, no matter what the product wrapper.

This is easier said than done, but the investment group to crack it first will be well positioned to take a significant part of the market.

JD: Initially, the IPA will add some further confusion to the pension arena. However, once people have got to grips with it, the impact will start to become significant.

I think it offers benefits to all concerned. Those using pensions will have a much greater selection of funds to choose from. It will provide access to some of the very best investment managers.

Fund providers will be able to tap a much bigger market and competition will be hot. Insurance company pension funds will come under pressure as the market is opened up to some of the best investment providers in the business.

Panel Members

Simon Davies, Berry Asset Management

Graham Hooper, Investment director, Chase de Vere

James Dalby, Senior analyst, Bates Investment


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