The niche investment sectors attracting our attention
12th September 2022 14:15
by Douglas Chadwick from ii contributor
August’s top funds all came from little-known investment sectors. Saltydog Investor explains why that could present an opportunity.
This content is provided by Saltydog Investor. It is a third-party supplier and not part of interactive investor. It is provided for information only and does not constitute a personal recommendation.
When we first formed Saltydog Investor, the founding objective was to try to break away from the “buy and hold” strategy advocated by so many in the financial services. It was soon after the financial crisis of 2007-2008 and we were convinced that there was a better way for private investors to manage their savings.
The world is a changing place and surely someone’s investments need to reflect this: what might work in one set of circumstances may not be appropriate a few years later.
We were very naïve. We started by tracking the performance of a handful of funds and soon realised that certain groups of funds had similar characteristics. That is when we realised the power of the Investment Association sectors, which now form a fundamental role in our analysis.
Back then, there were just over 30 sectors, classifying what the funds could invest in. Now there are more than 50.
In the first ten years there were not many changes. Money Market was split into Standard Money Market and Short Term Money Market, the Mixed Investment sectors replaced Cautious, Balanced, and Active Management and they added China/Greater China.
Last year we saw the biggest change that I can remember. First, they introduced 17 new sectors to replace what was once just Global Bonds, and then they added an additional six funds to recategorise funds that were in the Specialist sector.
The Specialist sector picks up all the loose ends, funds that do not naturally sit in any of the other sectors. After a while there may be sufficient funds with a similar theme to justify creating another sector. In September 2021, the Investment Association introduced the Latin America, India/Indian Subcontinent, Financial and Financial Innovations, Healthcare, Commodity/Natural Resources, and Infrastructure sectors. In a very challenging year for investors, some of these sectors have been the star performers.
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After the first eight months of this year, nearly all sectors were showing losses. The best performing sector was one of the new ones, Latin America, up 14.5%, and another, India/Indian Subcontinent, is up 9.3%. The Infrastructure sector is also one of the few to be ahead of where it was at the beginning of the year.
Last week I mentioned that the Investment Association does not calculate average returns for all sectors. One of these is Commodities and Natural Resources, but we know that some of the funds from this sector are also performing well.
When we look at the top 10 funds from last month, they all came from one of these new sectors or the specialist sector.
At the top of the table are three funds from the Latin America sector.
Latin America tends to do well when commodity prices are high. They have abundant natural resources like oil, copper, iron ore and lithium along with a climate that allows them to grow soybeans, corn, and timber. When prices and demand go up, they increase production which brings down unemployment, and increases business and consumer confidence. Consumer spending then rises, helping the domestic economy.
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The war in Ukraine forced up commodity prices earlier in the year and Latin America benefitted.
The funds had a great start to the year, but then fell during April, May, June and the beginning of July as fears of a global recession mounted. They have rebounded strongly since then and not only were they the best performing funds in August, but they are in the top 20 for the year. More than 85% of the funds that we track are showing losses so far this year, making year-to-date gains of 10% to 20% all the more exceptional.
The problem with these funds is that we know they can be volatile, and the graph shows that they can go down as quickly as they go up.
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These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.