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Specialist investment funds review

Specialist investment funds should generally be used as ‘satellite’ positions in a portfolio to complement more mainstream funds at the core.

| 13 min read

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 31/05/2023

Specialist investment funds to consider

1. Allianz Technology IT

The broader technology sector fell by over a quarter during 2022 as sentiment suffered at the hands of rising interest rates and inflation. However, that changed in 2023. Technology stocks have led global markets, increasing by around 30% 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.

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 wave of 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 performance versus its benchmark over the past year, and nor has being underweight Apple and Microsoft, two large and top-performing components of the index. However, 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

Although gold is traditionally seen as a form of protection from inflation, it hasn’t benefited a great deal recently. That’s because interest rates have risen too, which means some investors are minded to sell gold – which pays no interest – and buy assets that do. The higher yields now available in bonds, property or shares represent temptations, as do higher interest rates on cash. 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 will likely be 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.

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.

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.

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 past performance is not a guide to the future. The fund invests in shares of companies around the world operating in infrastructure related sub-sectors. The fund 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. There is also the general risk that assets with reliable income streams have become expensive in an era when yields generally are on the rise owing to higher inflation and interest rates. Should bond yields rise further, that might only be partly mitigated by any inflation protection at a project or company level, and that has been a particular headwind over the past year.

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.

4. Pantheon International

Having been a darling of investors in the post-Covid stock market boom, private equity has more recently become an anathema. Worries abound that estimated values of private assets are not up with events, insufficiently taking account of the new environment of higher interest rates and slowing economic growth. Private equity trusts such as Pantheon International have therefore been affected by significant negative sentiment, particularly as shares can trade at a different level to the value of their assets.

The more recent price action strikes us as overly dramatic. The economic outlook has deteriorated for sure, and we would not wish to underplay the challenges higher interest rates and inflation bring to corporates, but the level of discount on this Trust, which is typical of the sector as a whole, looks unwarranted. Pantheon’s assets are varied with a leaning towards investments on more mature buyout and growth capital investments rather than early stage venture capital. The nuances of the make-up of the portfolio are, we suspect, lost on most investors who are minded to jettison private equity from portfolios, regardless of valuation, based on memories of the Great Financial Crisis when values cratered.

Although things can always worsen before they improve, we think this could be an opportunity in the making. NAVs have been robust thus far, even allowing for the inevitable lag associated with valuing private assets on a regular but not constant basis, and we see no evidence of a more aggressive valuation methodologies being applied. More costly borrowing is undoubtedly an issue, but the sector on the whole has much less leverage at a fund and company level than the during the financial crisis. In short, we think investors able to look to the long term, beyond the barrage of negative commentary, are now being well compensated for the risks.

If you want to find out more about this area, check out my latest article on private equity in Investment Trusts.

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.

One factor helping propel biotech investments could be greater merger and acquisition activity, with larger pharmaceuticals needing to replenish drug pipelines and replace revenues from patent expiries. The managers also highlight some positive developments in the sector, including an upturn in FDA drug approvals in the US. The Inflation Reduction Act, which was approved last year, was also beneficial as it has settled concerns about prescription drug reforms that had been hanging over the sector.

Find more investments for your portfolio on our Preferred List.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus.