Investing: Don't get carried away by fads and fashion
If everyone is talking about a sector, it may be time to sell up, says Rob Griffin
Saturday 10 November 2007
Barely a week goes by without a fanfare heralding the arrival of yet another fund that will supposedly take the investment world by storm. Yesterday, it was HSBC Investment's turn in the spotlight with the launch of its Climate Change fund.
This portfolio, which will invest in companies that are expected to benefit from addressing, combating and developing solutions to the challenges posed by climate change, is the latest in a line of specialist products to be launched in this area.
Billions of pounds are being poured into ethical funds, property funds, natural resources funds and those that focus their attentions on specific parts of the world such as China, India or Latin America.
But does it make sense to invest in these portfolios or are they simply a cynical way for eager marketing departments to cash in on the latest fads?
Farley Thomas, global head of wholesale at HSBC Investments, believes that most fund launches fall into one of three categories: those entering an established mainstream asset class, a new product for a special interest group, or a genuine, global theme.
"To a certain extent, anything new runs the risk of being seen as a fad or a whimsical reaction to an opportunity," he says. "Like the rest of the investment industry, we will identify certain themes, some of which we'll support and others we'll rule out."
The most recent type of fund to attract the backing of HSBC Investments was BRIC portfolios, which aim to make bumper returns from investing in the emerging economies of Brazil, Russia, India and China. "Three years ago people told me that BRIC was just a fad but it's now a thriving part of the market," he recalls.
Climate change, Thomas believes, has the potential to be the new BRIC because it is already the "biggest environmental problem" we face and has manifested itself in the shape of more floods, more pollution and more natural disasters.
"People aren't yet familiar with this investment opportunity but we think it's colossal and are quietly confident it will be a repeat of our BRIC success," he says. "Most scientific research talks about what will happen in 2030, so between now and then companies participating in the area could be in line for huge growth."
Another "boom" area is Africa. New Star has recently launched its Heart of Africa fund, which offers investors the opportunity to invest in the sub-Saharan region of Africa, which has been undergoing a tremendous amount of economic and infrastructure development in recent years.
However, some advisers remain unconvinced. Marcel Porcheron, research analyst at Bestinvest, is one of them. "Our view is that most investors are far better off in a generalist emerging markets fund," he says. "This portfolio [New Star Heart of Africa], in particular, is about as high risk as it gets for retail investors."
According to Mark Dampier, head of research at Hargreaves Lansdown, the golden rule is to be extremely cautious about any fund that is the hot topic of conversation within investment circles. "You shouldn't buy something when it's a fad and booming because these sector funds are usually good for a couple of years and then go off the boil," he insists.
So where do you find such funds? Well, many of them reside in the Investment Management Association's "specialist" sector. More than £7bn of new money has flooded into it since the beginning of last year, according to the Association. This means that it now accounts for a 5.4 per cent share of the £473bn assets under management in the mutual fund industry.
Many investors have made handsome profits from this sector, points out Julian Chillingworth, chief investment officer at Rathbone Unit Trust Management, but success is down to doing your research and enjoying some good fortune.
"Investors can make very good returns within the specialist sector, but they must bear in mind that with greater upside comes greater volatility," he says.
Investors should examine the prospects for individual funds, advises Dampier. "They need to take a step back from the emotional pull of a sector and really examine it," he says.
Anna Bowes, savings and investments manager at AWD Chase de Vere, is quite positive about the prospects for HSBC's Climate Change fund, but says it's still impossible to say with any certainty which investment themes will succeed. "No one knows when stock markets will have had enough because they're fickle," she says. "Even if you think a sector has a good long-term story it doesn't make sense to put all your money in."
Andrew Merricks, head of investments at Skerritt Consultants, also likes to consider new areas. "I like the principle of investing in what the world needs," he says. "The Schroders Climate Change fund might seem faddy but it's not a bad shout because we're at an early point in the curve."
You don't have to look very far back to see what can happen when enthusiasm for an investment theme spirals out of control. The technology boom of the late 1990s saw a huge number of funds launched to invest in dot.com companies, but many of these collapsed when valuations slumped after soaring to unsustainably high levels.
Numerous portfolios were launched around this time – some like Jupiter Global Technology and the Gartmore UK TechTornado just weeks before the market peaked – and began to fall off dramatically. In the years since the crash, many of these funds have closed their doors for the final time, while others struggled for a while before gradually recovering. Whether or not they will ever return to their peak remains to be seen.
Mark Dampier, head of research at Hargreaves Lansdown, suggests that some funds which were badly hit when the technology dream turned sour may now be worth considering. A prime example, he points out, are the healthcare and biotechnology sectors, which rocketed at the height of the boom but which have been pretty poor in the seven years since the bubble burst.
"No one is talking about healthcare or biotech now, which probably suggests that it's time to buy them again," says Dampier. "You've got to buy these sectors when they're flat on their backs – that's the best time."
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