Do funds need a theme?

Themed funds are the latest in-thing, but it pays to examine what you are buying
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The Independent Online

Investment fashions come and go and the latest hot little number is the themed fund. You may have seen a string of adverts for funds such as Merrill Lynch Global Titans, Framlington New Leaders and others. These are themed funds, as are much-hyped technology funds such as Aberdeen Technology and Investec Guinness Flight Wired Index.

Investment fashions come and go and the latest hot little number is the themed fund. You may have seen a string of adverts for funds such as Merrill Lynch Global Titans, Framlington New Leaders and others. These are themed funds, as are much-hyped technology funds such as Aberdeen Technology and Investec Guinness Flight Wired Index.

If you are unclear exactly what constitutes a themed investment fund, you are not alone, many financial advisers also struggle with the definition.

John Hainsworth, independent financial adviser with Rickman Tooze, says the definition of a themed fund is pretty subjective. "Themed funds ignore traditional geographical sectors. They believe that companies operating on a worldwide basis will flourish, notably in areas such as healthcare, technology, media and telecommunications," he says.

Global themed fund Invesco GT Global Dynamic follows seven themes: financial services, natural resources, telecommunications, healthcare, technology, infrastructure and consumer products. The oldest global themed fund of all, Sarasin's Equisar fund, launched in 1994, includes technology, corporate restructuring and energy among its themes.

The start of the year saw a batch of new global themed funds, with Merrill Lynch Global Titans (formerly Mercury Global Titans) launched in January, CGU Global Success in February and Framlington New Leaders in May.

Launches continue to come thick and fast, and the themes are getting more esoteric. This week Credit Swiss launches its Global Post-Venture Capital fund, which aims to tap into the growth potential of young companies which have received venture capital funding. In September Fidelity launched four new global funds concentrating on individual themes with its Healthcare, Industrials, Financial Services and Consumers Industries funds.

But the fastest growing breed of themed fund in recent months has been technology. Old favourites Aberdeen Technology and Henderson Global Technology have been joined by a raft of new tech funds, including Close Euro e-TEX, FTSE eTX Innovation Index from Themis, AIB Govett's European Technology fund, Lloyd George Asset Management's Global Information Age Fund and Close Finsbury's Eurotech fund.

A further six technology funds were unveiled between April and June, from fund managers Artemis, Edinburgh, Royal & SunAlliance, Schroder and others. The bandwagon is expected to keep on rolling.

Mr Hainsworth advises most investors to stick with the tried and tested technology funds, and wait for the new boys to prove themselves. "Most advisers like to see some sort of track record before buying a fund. I feel very comfortable with the original technology funds such as Aberdeen Technology. Henderson Global Technology has also been a good fund, but its managers have all left recently."

The other technology fund he warms to is Investec Guinness Flight Wired Index. Launched in August 1999, it is unusual among trackers in that instead of tracking a FTSE or Dow Jones index, it follows one set up in June 1998 by journalists on US techie magazine Wired. Before you scoff, it must be remembered that the Dow Jones was also set up by hacks, at the turn of the last century.

Alongside tech giants Charles Schwab, Cisco Systems, America Online, Intel Microsoft, Nokia, Vodafone and Yahoo, the Wired index contains companies that initially seem ill at ease in this company, including hotel chain Marriott International, pharmaceuticals company SmithKline Beecham, retail chain Wal-Mart and Walt Disney. These more traditional companies are expected to benefit from the intelligent application of new technology.

"I believe this spread of companies reduces the volatility you expect from technology funds, because you are investing in old economy companies as well," Mr Hainsworth says. But the fund did not escape the carnage experienced by technology funds when values plummeted in April. It has fallen 1.63 per cent in the last six months, the only performance figures so far available from Micropal.

Healthcare is increasingly popular for themed funds. Biggest name in this area is Framlington Health, a highly volatile fund that grew 380 per cent over the last five years.

James Dalby, senior analyst with Bates Investment Services, says global themed funds are ideal for investors just starting to build their portfolio. "A good global fund is perhaps the best way to start expanding your horizons beyond the UK and Europe, where many investors have put too much money."

He recommends funds that invest in a spread of different themes, rather than a single theme, which exposes you to greater volatility. "Invesco GT Global Dynamic is ideal as it should give you a reasonable investment spread across a range of different industries. Healthcare may have great potential for growth, but it is risky to put your money in such a narrowly-defined investment." The fund grew 33 per cent over the last 12 months. Launched in 1997, three-year returns are not yet available.

Mr Dalby also points investors towards Sarasin Equisar, which has grown 67.41 per cent in the last three years. "This has a long track record of good, but not spectacular performance. It is a decent fund and worth considering, but on balance I prefer Invesco GT Global Dynamic."

He argues that the definition of a theme is so loose that it can be stretched to embrace ethical funds, which have had mixed success over the years. Ethical funds have grown in popularity, and recent years have seen a spate of new fund releases. There is even an ethical tracker, Legal & General's Ethical Fund, which filters out companies from the FTSE 350 that fail its ethical criteria, then tracks the remainder.

"My favourite ethical fund is NPI Global Care Income. It puts a lot of effort into getting companies to improve their behaviour and has performed well. Ethical investors should also consider Henderson Ethical," he says. NPI Global Care Income grew 144 per cent over the last five years, Henderson Ethical grew 110 per cent.

Bhavesh Amlani, director of financial advisers Simple Savings, warns many themed funds are little more than bandwagon jumpers rushed out by fund management companies in a bid to attract new money. Ignore the advertising, examine what you are buying and how it fits in with your other investments. "Don't be lured in by the marketing. Look at the track record of the fund management house and individual fund performance, if figures are available," he says.

Mr Amlani's favourite global themed funds is Merrill Lynch Global Titans. "This fund has a good management team. It has been taken over by Merrill Lynch, which has excellent research capabilities. With big companies geographical boundaries are much less relevant, global barriers are coming down and this fund gives you good general exposure to this developing theme."

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