Mark Dampier: Specialist funds - enjoy the good times and then get out

Specialist funds can do quite well over a limited period but will never consistently outperform

The fortunes of gold firms make a case for taking profits (AFP/Getty Images)

My first investment was more than 30 years ago. I was young and did not have huge sums to put away, and in those days the only option for regular saving, other than cash, was an endowment. These were hugely popular, and my three policies made me a tidy sum. Of course, because of their inflexible nature and the realisation of homeowners that they were far from infallible, they have since fallen out of favour with investors.

Today, funds make investing simple and provide access to the stock market for as little as £25 a month. But as they have gained in popularity so has the range available. In the past few years, a large number of themed or specialist funds have been launched. There is nothing intrinsically wrong with this, but I worry that these specialist investments could lead people to be overly concentrated in a niche area.

For example, buying into a fund that only invests in shares issued by financial companies would, as part of a balanced portfolio, provide a modest exposure to this area. However, if other funds within a portfolio also have significant holdings in these companies, the investor could be much more exposed to the performance of financial companies than first assumed.

Specialist funds can also lure investors into areas unsuitable for their risk profile. For a number of years, for example, biotech companies have performed incredibly well. Strong performance often attracts investors and specialist funds have provided easy access to the sector – at a time when they should have been most wary. Those who added to their exposure have since been hurt, as the sector has struggled since last July.

So, be cautious. Specialist funds can do quite well over a limited period but will never consistently outperform. A "buy and hold" strategy is a tried and tested method to make money over the long term, but this doesn't apply to investments in these funds.

Bitter experience has taught me that it is wise to take profits from a niche investment that has produced stellar returns. Specialist funds often invest in highly volatile areas of the stock market – and gains can be translated into losses in a matter of days.

A recent example would be funds backing goldminers. Take BlackRock Gold and General – between 2001 and 2008, it produced stellar returns, followed by a dramatic collapse during the financial crisis of 2008, in which time the fund lost more than three years of gains in seven months. It recovered and performed well until mid-2011, since when it has halved in value. Similar tales of volatile performance can be told across the specialist sector; Russia and China are two other recent examples.

The trick is to pay attention to coverage by the media and other investors. In my experience, the greater the hype, the closer the sector is to its peak. You can make spectacular returns by putting money in specialist funds and there is nothing wrong with jumping on bandwagons – provided a sense of reality is retained.

To be successful, an investor needs to adopt the mentality of a trader, and unfortunately most of us don't possess this psyche. Indeed, there is a tendency to forget investment rule No 1: buy good-quality funds and hold on to them for the long term, through the good times and bad.

In general, I would suggest the average investor steers well clear of overly specialised funds. Not only are they higher risk, they often cost more too, which is odd given there must surely be less research involved than for a fund with a wider remit.

My view is simple: spend more on fund managers with a proven track record, and less on funds that often only result in angst. More of this in my last column, next week.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit hl.co.uk