Specialist investment funds review

Specialist investment funds are focused on a particular sector or theme, cutting down the range of possible stocks to just a narrow band. Often the aim is to enhance returns by harnessing key themes, or to bring something different to a portfolio and offer diversification.

This means Specialist funds can vary a lot in terms of types and levels of risk, so make sure you understand a product fully by taking a look at the fund’s literature, notably the Key Investor Information Document.

The performance of specialist areas of the market can be erratic and quite different to the broader stock market, for better or for worse. Investors should therefore take a long-term view and be prepared to accept the associated volatility. Specialist funds should generally be used as ‘satellite’ positions in a portfolio to complement more mainstream funds at the core.

Overall, here's how the actively-managed funds in the Specialist sector on our Preferred List got on over the past year, and over previous time periods, with commentary on each fund detailed below.

Past performance of Specialist investment funds

Past performance is not a reliable indicator of future returns. Figures are shown on a % total return, bid to bid price basis with net income reinvested; Source: FE Analytics, data to 31/05/2024

Specialist investment funds to consider

1. Allianz Technology IT

Technology stocks have continued to lead global markets, increasing by around a fifth year to date as investors increasingly focused on the potential for the large tech companies to harness Artificial Intelligence (AI) to improve data collection and support automated processes. However, past performance is not a reliable indicator of future returns, and some investors are worried that high valuations may result in poor returns from this point.

AI is one of the key themes this specialist investment trust is exposed to, alongside cybersecurity, cloud computing as well as specialist semi-conductors which the managers prefer to the generic chipmakers because they believe profit margins will expand faster. It is no surprise to find top holdings include Apple, Nvidia, Microsoft, Alphabet and Meta. However, the trust offers exposure to the next tierof technology companies, not just the mega caps. The team are also comfortable with zero weights in some of the large legacy tech companies that don’t have the desired level of future growth potential.

Greater exposure to smaller names hasn’t helped the trust’s recent relative performance versus its benchmark over the past year, although a top holding in AI chip behemoth Nvidia has greatly assisted progress. For long-term investors with tolerance for high levels of volatility, we believe the Trust is well worth considering for exposure to the sector. The management team offer broad experience and expertise and are based close to the heart of the action in Silicon Valley.

2. BlackRock Gold & General and iShares Physical Gold ETC

Gold has entered the spotlight this year as central banks, investors, and households in the East have emerged as heavy buyers, notably in China as the end of the property bull market has triggered a major change in attitude towards to gold. Despite persistent selling from Western investors gold has breached its previous all-time-high, and is currently trading above $2,300/oz.

In many ways the renewed popularity of gold is linked to the trend of deglobalisation and heightened international tensions as central banks across the globe increasingly crave a non-politicised reserve asset. As the world continues to fragment geopolitically this trend could continue. However, high interest rates on cash and healthy yields on assets could continue to represent a headwind to precious metals that pay no interest.

On balance, it’s worth considering a small amount of exposure to gold as a ‘real’ asset with wealth preservation characteristics, but bear in mind it can be a frustrating asset to own with extended periods in the wilderness.

Some gold investors like to buy coins or bars, but this is unlikely to be a viable option for most people due to storage and insurance requirements. Fortunately, there are convenient ways to add gold to a portfolio such as an exchange-traded product. We tend to prefer ‘physically-backed’ ETCs (exchange-traded commodities) which own gold kept securely in a vault, as opposed to derivatives-based funds where there can be some added risk and complexity. One example is iShares Physical Gold.

A higher risk route into gold is through shares in gold mining companies. These tend to represent a ‘geared’ play on the gold price, meaning they multiply the effect of a rise – but also multiply any fall. This is because profits can be highly sensitive to what the gold price is doing, and the riskier firms could even swing from profit to loss or vice versa on these moves.

While gold prices have been rallying, gold equities have lagged the bullion price recently. As gold demand has emanated from the East and been concentrated on the physical metal, there has been little corresponding upturn in interest in the shares of gold mining companies where the natural buyers are mostly in the West. Rising costs and, in some cases, poor operational performance has also held back returns in this higher risk sub sector. However, the longer the bullion price stays elevated the more investors will have to reconsider the undemanding valuations on offer.

One option in this particularly adventurous area is Blackrock Gold & General. Managed by the experienced Blackrock's Natural Resources Team, it invests in gold and other precious metal-related businesses on a worldwide basis. The fund holds between 50 to 80 companies, the vast majority of which are established producers of gold, with exposure to pure exploration stocks (typically the riskiest in the area) relatively low compared with some of its peers.

Read more: How to invest in gold, silver and other commodities

3. FTF Clearbridge Global Infrastructure Income

Infrastructure assets can offer income, some inflation protection and low correlation with the stock market and economic cycle, and often some stability. They provide the essential framework of services to support economic and social activity, for example, electricity, gas, water, transportation. Assets often have an important strategic position and face less competition, and they may have more predictable cashflows which are often linked to inflation.

However, they are also ‘long duration’ assets that share characteristics with bonds, and as such they have struggled as interest rates have risen and subsequently remained high. This resulted in a poor period in the first half 2023 and, overall, little progress over the past year.

This fund’s management team are experienced infrastructure specialists based in Australia and have built an impressive record whilst consistently delivering a decent yield, although the value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. The fund invests in shares of companies around the world operating in infrastructure related sub-sectors. It is exposed to both regulated assets (gas, electricity and water utilities) and to ‘user pay’ assets (toll-roads, airports, rail and communication towers).

There is an element of political risk to bear in mind, and at a single company level there are a myriad of variables that can impact operations and profits. As a recent example, the UK’s National Grid was one of the fund’s top positions as at the end of April and the stock came under significant pressure following a £7bn rights issue to fund future investment requirements.

As with any investment area, diversification makes sense, and we believe this fund is a sensible and well managed option. Compared to some others in the sector it is more income-orientated with a higher dividend yield. The strategy has a structural tilt towards income-generating regulated utilities (minimum 50%) but also maintains the flexibility to invest in more growth-oriented infrastructure. The fund has lagged core global infrastructure indices in the year to date but the team see considerable upside in their portfolio.

4. Pantheon International

There are an increasing number of opportunities outside of stock markets in the world of private investments. Investment Trusts like Pantheon offer investors a gateway into this area that is normally only accessible to institutions and high net worth individuals. It invests in a global, diversified portfolio of private equity-backed companies, using a mixture of direct investments and private equity funds managed by leading firms.

The depth and expertise of the Pantheon investment team combined with the broad nature of the underlying portfolio and solid long-term track record makes the trust a worthy consideration for exposure to the asset class, although past performance is not a guide to the future. The approach focuses on maintaining varied exposure to different parts of the private investment life cycle. Investors in the Trust therefore access a portfolio diversified by manager, investment type, stage, geography, fund, vintage and sector.

Pantheon has also been a leader in buying back its own shares to close a wide discount to net asset value, something that’s persisted across the sector in recent years. There remains a perception among investors that higher interest rates will have a big impact on private equity-owned companies, which trend to have higher debt. The managers points out, however, that generally their portfolio companies do not rely on debt as much as is average for private equity.

We continue to believe the Trust is useful exposure to a sector that provides diversification from broad share markets, albeit private equity is still equity and investors should expect it to move roughly in tandem rather than it being truly ‘alternative’.

5. Schroder Global Energy Transition

Investment in climate solutions has rapidly moved from the periphery into mainstream. To achieve climate goals, how we produce, distribute and consume energy will have to change significantly and it will require huge investment to get to net zero. Consequently, Energy transition is a multi-decade theme where capital will be reallocated on an unprecedented scale, creating investment opportunities across a multitude of sectors and industries.

By investing in industry-leading sustainable companies in areas such as batteries, electric vehicles and wind power, investors can help align their portfolios with that transition. Companies have a key role to play in the battle against climate change and the evolution of a more sustainable energy system, and the huge investment required will likely create significant opportunities. Businesses delivering products or services that are part of the solution should be well placed to deliver growth to shareholders.

We believe a selective, disciplined and active investment approach such as the one adopted by this fund is a sensible means to access the space for a small portion of a portfolio. The combination of a well-resourced team and competitive charges for a fund of its type add to the attraction. However, even among the more established businesses in the energy supply chain there will likely be significant losers as well as winners, so the positive environmental credentials should not distract from the high risk involved.

Over the past year, for instance, the fund has suffered the headwind of exposure to smaller and mid-sized companies, which have lagged overall in an environment of higher interest rates. For patient, longer term investors it could be worth considering as a more adventurous holding in a broad portfolio.

6. Worldwide Healthcare IT

The key structural driver behind the sector is growth in patient numbers, spending and drug approvals. The world will have 1 billion more elderly people by 2050, which means more government and private spending. A growing middle class in the developed world is also likely to add substantially to the numbers of patients and worldwide spend. At the same time, the industry is producing cures, treatments and technologies at a faster pace than ever before – so it is well placed to meet the growing demand.

This specialist investment trust remains a consideration for diversified exposure to this part of the market. It has a solid long-term track record of stock-picking and a highly experienced management team. The portfolio is focused but well spread by sector covering pharmaceuticals, healthcare equipment and supplies, healthcare services and biotechnology. The latter is a differentiating factor to others in its immediate peer group, especially since it includes emerging biotech companies that are typically smaller in size. This has been a hindrance to performance in recent years, but the managers believe the businesses will ultimately benefit from higher levels of innovation and growth.

The big story in the sector has been the obesity drugs boom where a new generation of drug treatments such as Novo Nordisk’s Ozempic and Wegovy, has been heralded as a gamechanger. The trust has exposure to this theme through Novo as well as competitors Astra Zeneca and Eli Lily. While these have performed well, performance has been held back by exposure to biotech where there has been more lacklustre returns. Drug pricing reform is not on the table in the immediate future, so the managers are still positive on the biotech space. One factor that stands to help propel biotech investments could be greater merger and acquisition activity, with larger pharmaceuticals needing to replenish drug pipelines and replace revenues from patent expiries.

Find more investments on our Preferred List