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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
27 September 2016

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 companies have performed strongly over the past five years but have recently stalled over concern over potential political interference in the US. Meanwhile, many companies in the energy, mining and resources sectors are currently lowly valued and any sustained rebound in commodity prices could see company share prices recover. However, there are no guarantees and these are areas that can remain out of favour for long periods and be highly volatile.

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 successfully bought costs back under control. Any recovery in the gold price will likely be reflected in stronger share price performance of these companies. Indeed, the gold price bounced strongly following the UK’s vote to leave the EU as investors favoured gold’s defensive characteristics. This caused gold mining companies to rise 38% in the two weeks following the vote, although this is not a guide to future returns.

The Gold Price vs Gold Mining Companies over past 5 years

Source: Lipper IM to 01/09/2016. Past performance is not a guide to future returns.

Energy

Companies operating in the energy sector are heavily reliant on the underlying price of oil. The collapse of the oil price and a history of poor cost control has had a detrimental effect on company profits and the sector has encountered a torrid time over the past few years. Many companies in the energy sector are now lowly valued and any sustained rebound in underlying oil price could see company share prices recover, although there are no guarantees.

The oil price today is not that dissimilar to where it stood 10 years ago, although it has been anything but a smooth ride. The oil price has been as high as $140 a barrel and as low as $25 over this period. 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. Since January this year the oil price has recovered some of its lost ground as supply abated and OPEC indicated a willingness to step in to limit supply further if necessary.

Oil Price vs Oil & Gas Companies over past 5 years

Source: Lipper IM to 01/09/2016. Past performance is not a guide to future returns.

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. Performance over the past year, however, has been varied as the threat of US political interference has caused uncertainty and prompted share price volatility.

Performance of World Healthcare Companies vs FTSE World Index

Source: Lipper IM to 01/09/2016. Past performance is not a guide to future returns.

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

Other funds in the sector

Source for performance figures: Financial Express

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. This bias to quality companies has led the fund to underperform its peers since the gold price began to rise in January this year as they have lagged their lower-quality counterparts.

Barrick Gold, for example, is the largest gold producer in the world and accounts for a large part of the index but only a small part of the fund. This has hurt performance as investors have flocked to this company as an obvious way to gain access to the sector, driving the share price 57% higher over the three months to end of June (demand for gold peaked in late June as investors fretted about the impact of the UK’s vote to leave the EU). However, the manager feels the company is of poorer quality than other options and is now overvalued, so he has not increased the fund’s exposure.

Exposure to higher-quality companies over the longer term has aided performance. The fund has tended to lag in periods of falling share prices but shelter investors from the worst of price falls. Although recent performance has been strong, the manager has not yet recouped the losses of the five years prior.

The fund has exposure to higher-risk smaller companies and emerging markets. 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.

Dani Saurymper favours smaller biotech and pharmaceutical businesses over their larger counterparts as this is where he feels the majority of innovation occurs. This has hurt 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 higher-risk 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 weaker sterling versus the US dollar.

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.

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. The managers tend to favour higher-risk small and medium-sized exploration and production companies, which has hurt performance over the past five years as these businesses have underperformed larger oil companies (which make up the majority of the index). Our analysis suggests poor stock selection has also materially detracted from returns over this time. 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 fund has exposure to higher-risk emerging markets. 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.

Neil Gregson assumed management of the fund in February 2012, one year into a prolonged period of falling commodity prices. It has undoubtedly been a difficult environment for the fund, but we have been disappointed by its performance. While the manager has positioned the fund towards areas that have performed well, our analysis suggests his stock selection has detracted from returns.

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 feels these companies will be the first to benefit from any recovery in commodity prices. The recovery of these businesses in the aftermath of the UK’s vote to leave the European Union bolsters this view, in his opinion.

The fund has exposure to higher-risk smaller companies and emerging markets. 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.