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Specialist Sector

Specialist sector

The specialist sector encompasses funds focused on a wide variety of subsectors, from mining to agriculture to healthcare.
Heather Ferguson

Heather Ferguson - Investment Analyst
1 June 2017

The specialist sector encompasses funds focused on a wide variety of subsectors, from mining to agriculture to healthcare. Their varied nature allows investors to gain access to niche areas they may otherwise only be marginally exposed to through more generalist funds.

Healthcare has been among the strongest performing specialist sub-sectors over the past five years. Strong performance followed Donald Trump’s election to The White House as many investors felt this reduced the likelihood of aggressive drug price legislation. This went some way to undoing a number of previous setbacks due to potential political interference from Hilary Clinton. Please remember that past performance is not a guide to the future.

Meanwhile, many companies in the energy, mining and resources sectors, despite stronger performance throughout 2016, remain lowly valued, having fallen significantly in value over the prior four years. While any sustained rebound in commodity prices could see company share prices recover, there are no guarantees and these are areas that can remain out of favour for long periods.

Our view

As our quantitative analysis of speciality funds has become more sophisticated over time, we have found few managers in these areas have the ability to consistently add value for investors over the long term. As such, very few specialist funds are contenders for the Wealth 150 list of our favourite funds across the major sectors.

Specialist fund managers are relatively constricted on where they are able to invest, whereas a generalist fund manager can choose if and when to increase exposure to a specialist area. A balanced portfolio of funds is likely to provide the average investor with adequate exposure to key areas such as oil & gas, healthcare, gold and agriculture, in our view. We would suggest an investor wishing to add specific exposure to a high-risk specialist area should ensure it only accounts for a small proportion of their portfolio.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in this sector

First-class performance potential and low management charges

View the Wealth 150

Gold

Gold mining companies have been one of the most volatile areas of the specialist sector in which to invest over the past five years. Investors have not been rewarded for this additional risk as it has also been one of the worst performing.

While there is some link between the gold price and the fortunes of gold mining companies, the performance of the latter in recent years has highlighted their increased risks. Mining companies are affected by a range of factors in addition to the price of gold, including management decisions and the costs associated with finding and producing gold. A number of years ago, many companies let costs spiral and squandered the benefit of a higher gold price, and so suffered when the gold price fell.

Many of the businesses that survived the lower gold price have now successfully brought costs back under control, so a recovery in the gold price is more likely reflected in stronger share price performance of these companies, in our view. Indeed, the gold price bounced strongly following the UK’s vote to leave the EU as investors favoured gold’s defensive characteristics. The share prices of gold mining companies rose to an even greater extent. However, while the gold price has been relatively stable since, mining company share prices have generally fallen.

Performance of gold mining companies to the gold price

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017.

Energy

The oil price today is not that dissimilar to where it stood 10 years ago (in sterling terms), although it has been anything but a smooth ride. The oil price fell sharply between mid-2014 and early 2016, as oil supply outstripped demand and investors worried about the impact slowing growth in China would have on commodity prices. From January 2016, the oil price recovered some of its lost ground as supply abated and OPEC indicated a willingness to step in to limit supply further if necessary; although this recovery was short lived as 2017 has seen the oil price fall once more.

Companies operating in the energy sector are heavily reliant on the underlying price of oil and performance tends to be correlated. Our analysis suggests energy companies are lowly valued and any sustained rebound in the underlying oil price could see company share prices recover, although there are no guarantees.

Oil Price vs Oil & Gas Companies over past 5 years

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017.

Healthcare

Healthcare encompasses everything from large pharmaceutical businesses, to hospitals, to medical equipment manufacturers, to tiny biotech start-ups. It has been the best performing area of the specialist sector over the past five and three years as new drug discoveries and favourable conditions (an ageing demographic, increasing wealth in emerging markets etc.) have generated positive investment sentiment. The share prices of healthcare companies reacted favourably to Donald Trump’s election to The White House as the threat of aggressive pricing reform, favoured by Hillary Clinton, diminished.

Performance of World Healthcare Companies vs FTSE World Index

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Our favourite funds in the sector

We undertake a comprehensive review of every sector. Here we provide comments on a selection of funds of interest following our most recent Specialist sector review. They are provided for your interest but are not a guide to how you should invest. We would suggest an investor wishing to add specific exposure to a high-risk specialist area should ensure it only accounts for a small proportion of their portfolio. If you are unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at June 2017. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 150. There is a tiered charge to hold funds in the Vantage Service with a maximum of 0.45% p.a. - view our charges.

Other funds in the sector

Source for performance figures: Financial Express

The outlook for global economic growth is improving, which would generally prove a headwind for the gold price as investors are more likely to favour gold when then outlook is poor. However, Evy Hambro, the fund’s manager, feels continued uncertainty caused by Brexit and President Trump will support the gold price moving forwards as he expects investors to favour the yellow metal for its perceived safety. Rising incomes in emerging markets could also lead to greater retail demand while the absence of new gold discoveries constrains the supply. This supports the manager’s positive long term outlook for gold. The manager has the flexibility to invest in emerging markets, which can adds risk.

The fund has limited exposure to physical gold. The majority of the fund is invested in the shares of gold mining companies, which should benefit from any rise in the gold price. The manager favours quality companies with established mines and strong balance sheets, as he believes they perform better over longer timeframes (that include periods of both a falling and rising gold price). He has recently increased exposure to higher-quality small and medium-sized gold producers to increase the fund’s sensitivity to gold price movements – smaller companies tend to be more volatile and so share price movements tend to be more pronounced than for their larger counterparts, although this makes them higher-risk. This has contributed positively to performance in the short term, and the fund has outperformed the FTSE Gold Mining Index over the past year. Past performance is not a guide to future returns.

Dani Saurymper favours higher-risk smaller biotech and pharmaceutical businesses over their larger counterparts as this is where he feels the majority of innovation occurs. This has helped recent performance as these companies have fallen to a greater extent in the market volatility of early 2016. Larger healthcare companies such as Johnson & Johnson, which are perceived as lower-risk, have outperformed their smaller counterparts as investors flocked to safety.

The manager focuses on companies with innovative products that address unmet medical needs. As these businesses are often the only supplier of medication for a particular illness, they are able to command a premium price. He also expects these businesses to be relatively sheltered from US drug pricing reform as he feels the government is not likely to prohibit patients from obtaining life changing medications. Meanwhile, he avoids large pharmaceutical companies as he feels these are the most likely targets for US cost cutting measures.

Only a very small proportion of the earnings generated by the companies in the portfolio are derived from the UK, yet UK companies account for around 10% of the portfolio. The manager therefore expects the fund to benefit from any further weakening of the pound.

John Dodd and co-manager Richard Hulf, have the freedom to invest worldwide, in energy companies of all types, but the fund has had a bias to oil & gas companies since launch and the managers tend to favour higher-risk small and medium-sized exploration and production companies. This has generally hurt performance over the past five years as these businesses have underperformed larger oil companies (which make up the majority of the index), although it was partly responsible for improved performance in 2016, before detracting from returns again this year.

Our analysis suggests poor stock selection has also materially detracted from returns over the past five years. The fund operates a concentrated portfolio which enables each holding to make a significant impact on returns however this is a higher-risk strategy. The managers also invest in emerging markets, which adds risk.

Neil Gregson assumed management of the fund in February 2012, one year into a prolonged period of falling commodity prices. The sector continued to struggle until January 2016, at which point a revival in commodity prices boosted share prices of commodity-related businesses. The fund performed in line with the benchmark throughout 2016, although a relatively low exposure to gold mining companies, that performed well, held back returns.

It has undoubtedly been a difficult environment for the fund over the majority of the manager’s tenure, but we have been disappointed by its performance nevertheless. Other than a period of average performance through 2016, the fund has consistently underperformed its benchmark.

According to the manager, the prolonged period of low commodity prices has caused many companies to delay or cancel investment into new projects and has bankrupted many high-cost producers, reducing the level of supply. He therefore feels small improvements in demand could have a significant effect on commodity prices. The fund is focused on companies that mine or extract commodities, as opposed to those involved in their processing, storage, transportation or marketing. The manager has the flexibility to invest in emerging markets, and smaller companies which are higher-risk. The concentrated nature of the fund also adds risk.