Fads and fashions: where not to invest

Some investment sectors will end up making you look silly. Rob Griffin reports

Building work in China, a favourite of Bric investors (AFP)

They are the investments that get widely tipped as being the success stories of the future which will help to guarantee thousands of people a far more comfortable standard of living – but do they ever live up to such lofty expectations?

These so-called fad funds are launched on the back of massive surges in popularity towards certain asset classes or geographical regions, fuelled by enthusiastic investment houses, and bought by eager individuals seduced by the idea of making bumper profits.

There have certainly been lots of fads over the last decade, with some quickly going in and out of fashion, while others prove to be rather more sustainable, according to Geoff Penrice, a chartered financial planner at Astute Financial Management.

"Every year there seems to be a new flavour of the month, either in terms of assets class or specific investments," he says. "Some of the assets which have been hyped at certain times over the last 10 years include oil, emerging markets, gold and, perhaps the biggest of them all, property."

In many cases these launches are more likely to be spearheaded by ambitious sales and marketing departments rather than investment professionals, argues Jason Hollands, managing director at Bestinvest.

"Firms see new product launches as a quicker way to gather assets than the slower process of developing competitive track records on existing funds," he says. "Once one firm comes up with a novel idea for a new fund, invariably there is a rush of 'me-too' products from competitors because the sales teams bleat that they are missing out on new business opportunities."

According to Justin Modray, founder of the website Candid Money, whether these novel ideas prove to be a longer-term success depends on whether it has the fundamental qualities required to back up the investment thesis.

"Most fads are a result of strong past performance and/or short-term beliefs on the best places to invest," he says. "Fads are fine provided there's a valid case for owning the underlying investment, but if you're not careful you could find yourself jumping on a misguided bandwagon."

Today we throw the spotlight on to a variety of these money-making ventures, many of which people still hold today, and seek expert opinion to decide if they are still – or, indeed ever were – worthy of a berth in portfolios, or whether they should be consigned to an investment museum.

Bric funds

The term Bric was coined a decade ago by Jim O'Neill, a senior executive at Goldman Sachs, to describe an investment in four key, emerging markets – Brazil, Russia, India, and China – which were expected to grow rapidly.

Despite struggling recently as all four countries have had problems, Brics initially performed very well, and gave rise to other investment acronyms, such as Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa), points out Andy Gadd, head of investments at Lighthouse Group. "Brics have generally been viewed as a success, although they have been volatile, but time will tell whether the other acronyms will prove to be as successful," he says.

Recent performances have, indeed, been poor. In fact, the best-performing BRIC fund – Allianz BRIC stars – is down 4.61 per cent over five years, according to data compiled by Morningstar to 24 September. However, those still holding Bric funds may keep them and be in a strong position to benefit when these markets turn positive.

Verdict: On balance a success – although prospects are volatile.

Commercial property

This has been one of the most popular investment areas of the last 10 years, with people becoming quickly seduced by the idea that bricks and mortar was a guaranteed route to riches, in much the same way as the investment-led boom in the residential property area.

During the boom years, both buildings and property company shares soared in value on the back of investor demand for anything related to this area – but then came the credit crunch and global recession, which was a hammer blow to funds operating in this area.

It was a tough time, recalls Mr Penrice. "In 2006 commercial property had increased year-on-year for over a decade and people started to believe the only way was up," he says. "Property became one of the most popular areas – just in time for a 40-50 per cent fall in values."

This has obviously affected performance figures. The average fund in the IMA Property sector is down by 16.07 per cent over the past five years, according to Morningstar figures to 24 September. However, the sector has started to stabilise, and the three-year numbers to the same date show an average rise of 23.21 per cent, with the best funds rising by more than 50 per cent.

Verdict: Worth having limited exposure – but don't get carried away.

130/30 or "long-short extension" funds

The idea behind these funds, which peaked in popularity around 2007/8, was to enhance returns by allowing managers to use part of the portfolio, typically 30 per cent, to take short positions, and then to use the proceeds from this to extend their long position to 130 per cent.

It was hoped that this approach would allow them to use their knowledge of companies they didn't like to supercharge their positions in companies they did, according to Jason Hollands at Bestinvest.

"Some were predicting these funds would grow into a multitrillion-dollar industry, but it's all gone a bit quiet," he says. "The credit crisis unfurled shortly after these funds were launched, and the last thing investors needed was experimental, super-charged funds in a market where liquidity dried up and counter-party risk was high on the radar. Many have quietly been shut down."

Verdict: A fad and to be avoided.

Gold and precious metals

This has been one of the success stories of the last decade. In fact, the BlackRock Gold and General fund is up a staggering 331.84 per cent over the 10 years to 24 September, according to figures compiled by Morningstar.

One of the principal attractions of gold is that it can't be easily devalued by political decisions around the world. This makes it especially attractive in tough financial conditions, the like of which we have been experiencing over the past five years.

As a result, this area has enjoyed an incredible 10 years – even though life has become rather more challenging for funds operating in this area over the past 18 months, according to Mark Dampier at Hargreaves Lansdown.

"Gold-mining shares haven't kept up with the gold price," he says. "The costs of production have risen," he says. "Secondly, a lot of investors have taken the opportunity to buy ETFs (exchange traded funds) and physical gold who would have otherwise bought gold-mining shares. It does have a value, though, and I still think gold is a good place to be."

Verdict: Worth a place in portfolios.

Absolute return funds

Who wouldn't find the goal of absolute return funds – which is to deliver more than zero in any market condition on a 12-month rolling basis – an attractive prospect? Their managers can embrace a long list of asset classes and use a range of complicated investment tools and techniques.

The performances have been pretty bad. Over the past 12 months almost a quarter of the funds in the IMA Absolute Return sector have lost money, with the worst having shed 26 per cent. At the other end, however, the best have delivered positive returns of almost 30 per cent.

This is the issue facing advisers, according to Mr Dampier. The concept may sound attractive, but very few funds have thus far been able to deliver on their promises.

"As a sector it has appeal, but the fact is that not many groups have been able to run one successfully," he says. "It's early days, so in some ways it's an unproven sector, but so far it hasn't done very well, and it's also riddled with performance fees, which I hate."

Verdict: The jury is well and truly out.

Environment and climate change funds

One of the big news stories over the past decade, climate change funds started being launched with regularity from 2007 in order to take advantage of what was seen as a widespread move to embrace environmental issues with more vigour, recalls Jason Hollands at Bestinvest.

"These were not narrow alternative energy funds but ones which invested in stocks that might benefit from the shift towards low-carbon economy, businesses involved in mitigation and adaptation," he says. "Firms that got in on the act included Schroders, HSBC, F&C, Jupiter, SAM and Virgin, but performances have generally been disappointing."

Unsurprisingly – given the lacklustre returns which were generated – there are only a relative handful of funds involved in this area, and Darius McDermott, managing director of Chelsea Financial Services, believes that investors who have embraced this particular area may need to re-evaluate their positions.

"Ethical funds will still be bought by ethical investors, but I think some of the environmental funds are a bit faddy," he says.

"These really are niche investments that will go through some periods when they perform and other times when they don't do so well."

Verdict: A mixed bag. Definitely some fad areas – but still worth considering by niche investors.