Thematic funds are often regarded as a fad by investors. While there may be good reason for this market skepticism, there are some fund houses that excel at investing in niche sectors and there is much that can be learned by looking at these funds

This month we look at the world of thematic funds. These are often seen as simply ‘fad’ funds, launched consecutively by fund houses once one or other of them believes it has tapped into a new area of the market investors are keen to exploit.

There have been many examples of when fad funds have gone wrong, not least the dot com funds of the late’90s, which collapsed in spectacular style losing investors millions and bringing the rest of the equity markets down with them.

However, sceptics will often urge caution with something new and, while many thematic funds could arguably be accused of being fad funds, it could also be said they are simply exploiting new and interesting markets and the reason for their popularity is that investors share this view. The trouble with this argument is of course that when investors move en mass, they are often moving too late or for the wrong reasons.

Over the next few pages, Morningstar analyst Mark Laidlaw will explore a number of the funds currently on the market. Laidlaw makes it pretty clear that he, and Morningstar, are on the whole very much in the sceptical camp when it comes to thematic investing.

However, he does highlight a few fund houses for whom investing in small sectors is something at which they excel. Not least is BlackRock which Laidlaw argues has one of the best natural resources teams in the industry.

Laidlaw also argues these funds are really only suited to sophisticated investors who understand the markets they are getting involved with and, even then, it should probably only be a very small percentage of their portfolio.

Nevertheless, there are some very interesting funds covered over the next few pages with greatly differing returns and, as expected with funds so specifically targeted, volatility is largely very high. What these funds can offer the less sophisticated investor, or indeed the IFA, is an insight into some of the larger sectors, or geographies which form a part of a well constructed diversified portfolio.

Take for example the HS Financial Sector Flexipower and HS Consumer Sector Flexipower funds which are both China-focused sector funds. While most investors would not want to gain exposure to just the financial or consumer sectors alone, they would do well to take the occasional look at the make-up of these funds and others like them, so as to make a more informed choice when deciding which manager to select for exposure to the country as a whole.

It is also worth considering when you read the following pages whether or not size matters. Although this is an issue which crops up time and again within all fund sectors, with funds such as these the question is perhaps more pertinent as they will be dealing with a much smaller universe and therefore are able to diversify less (as a percentage of assets under management) as the fund size grows.

“While most investors would not want to gain exposure to just the financial or consumer sectors alone, they would do well to take the occasional look at the make-up of these funds and others like them, so as to make a more informed choice when deciding which manager to select for exposure to the country as a whole”