Investor John Baillie attended an investor day where he could ask questions before deciding on a fund. Photo: Joe ArmaoWhether it is the rapid expansion of China’s middle class, the ageing of the populations of the developed world, or cyber security, opportunities abound for savvy investors.
The challenge is working out the knock-on effects of these mega-trends and who will be the likely winners and losers.
Some investors can chase the latest hot theme only to end up regretting their losses.
That’s why, for many investors, it is better left in the hands of the professional fund managers.
They put together a portfolio of investments that are expected to profit from a theme, which is offered to investors as a single investment.
With the help of investment researchers, Money has identified four managed funds and one listed investment company that have runs on the board by exploiting themes. Healthcare boom
Healthcare is a theme that is delivering.
What is it – Platinum International Heath Care Fund invests in the shares of health care companies from around the world, ranging from those doing research, to health insurance, through to those providing health care services to consumers, such as hospitals.
Returns – From inception in November 2003 to June 30, 2017, the fund produced an annual average compound return of 9.47 per cent.
Pros – Platinum Asset Management is a Sydney-based fund manager, considered among the best global share fund managers in the world.
Cons – Platinum is a “contrarian” investor, meaning it does not follow the herd. From time-to-time, returns can lag those of sharemarkets. Indian economic reforms
The development of India is tempting some investors. Photo: iStock
What is it – the Fidelity India Fund invests in a diversified selection of 50 to 70 Indian-listed companies and draws on the research capabilities of Fidelity’s analysts based in India. Fidelity is one of the world’s biggest fund managers.
The portfolio holds companies that are producing higher returns on capital, good cash flows and have low debt and quality management.
Returns – From inception in October 2005 to June 30, 2017, 9.8 per cent.
Pros – India’s population is growing more quickly that China’s and many commentators believe the size of India’s economy will eventually outstrip that of China.
Cons – India is a messy and boisterous democracy with a huge disparity in wealth. India in the process of rolling-out a single indirect tax across the country and there could be some economic turmoil, at least in the short term. Chinese consumer spending
China’s burgeoning consumer class offers opportunities. Photo: AP
What is it – Premium China Fund invests mostly in companies listed in Hong Kong, mainland China and Taiwan. It can also invest in companies listed on other stock exchanges that have significant connections to the Greater China region.
Returns – From inception in November 2005 to June 30, 2017, 10.55 per cent
Pros – McKinsey & Company estimated in 2013 that by 2022, more than 75 per cent of China’s urban consumers will be earning $US9000 to $US34,000 a year. Some estimates say the middle class will number more than 600 million by 2022. And they will be spending more on leisure, including travel, and consumer goods like flat-screen TVs and more on niche over mass brands.
Cons – China can be a risky place to invest – though the rewards are there. There are some obscure ownership structures and corruption scandals as well a general lack of transparency in the legal process. Investing with a conscience
Former US vice-president Al Gore encourages investing with an eye to the environment. Photo: Ben Rushton
What is it – Generation Wholesale Global Shares Fund was founded by Al Gore and others in 2004. It’s available to n investors through Colonial First State.
It develops a series of industry road maps that focus on industry-specific long-term trends. Companies are whittled down to a portfolio of up to 60 listed companies on sharemarkets around the world that have sustainable business models and high-quality managements.
Returns – From inception in October 2007 to June 30, 2017, 10.14 per cent.
Pros – The investment approach is based on the conviction that sustainability factors, including economic, environmental, social and governance criteria, will drive a company’s returns over the long term.
Cons – Management costs of 2.22 per cent a year, with a performance fee on top, are a drawback. And its sustainability bent means the fund does not screen-out certain “bad” sectors, which might not suit some investors. Agribusiness and water rights
Irrigation rights can be valuable. Photo: Michelle Mossop
What is it – Blue Sky Alternatives Access Fund is an ASX-listed investment company (code: BAF) that invests in a diverse range of alternative assets, including private equity, venture capital, water rights, agribusiness finance and real property.
Returns – From inception in June 2014 to June 30, 2017, 9.33 per cent.
Pros – Broadly diversified for those investors who want exposure to several themes. As it’s listed on the n sharemarket, shares in the fund can be bought and sold just like any other listed company.
Cons – The fund holds unlisted assets, which are valued periodically. And a significant component is in real estate, including property development that tends to be higher risk. Caution needed
Tim Murphy, director of manager research at Morningstar, says while there are opportunities with themed investments they can also go wrong.
The classic example is the tech funds that were launched just before the start of the “tech wreck” in 2000.
Tim Murphy from Morningstar, warns there are risks. Photo: Nic Walker
Most were launched with $1 unit prices and are now trading at less than $1.
“Sometimes the funds can be launched fairly late in the theme. I think that’s the biggest potential drawback of some of these funds,” Murphy says.
Investors may be better off with a fund that can invest broadly in global shares, he says.
Murphy says anyone thinking of investing in a themed fund should be prepared to invest for a minimum of 10 years.
David Smythe, co-founder of investment researcher Zenith Investment Partners, says some investors can “go for the theme”, but not every manager has the skills to “execute” the theme successfully. Diversification is key
“These funds need to form part of a broader and well-balanced portfolio that matches the investor’s risk profile,” Smythe says.
They could have more of a supporting role, with the main role played by a fund with a broader share exposure, he says.
Investors should be aware that there are many exchange traded funds (ETFs) that invest with a theme, Smythe says.
ETFs are listed on the n sharemarket with units in them bought and sold just like the shares of listed companies.
They have very low investment management fees, but they are “index” or “passive” managers, meaning they track or mirror the returns of a market, index or prices, like those of gold or oil.
The active managers listed above buy and sell investments in order to outperform the market in which they invest.
There are ETFs that track all sorts of themes. For example, some track Chinese shares and sharemarket sub-sectors such as healthcare and cyber security. Then are also ETFs that invest with screens. Exposure sought
John Baillie, 56, from Melbourne, has a background in finance and is now a professional company director.
He has two grown-up children and together with his wife has a self-managed superannuation fund.
Like many SMSFs, John is overweight in n shares.
He looked at the Future Fund, the sovereign wealth fund established by the n Government to meet unfunded public service superannuation liabilities.
One of the reasons for the fund’s good returns was that it includes alternative investments.
“I wanted exposure to real estate and to private equity,” he says.
Alternative investment manager Blue Sky has a track record of impressive returns, but for John what really matters is the quality of those managing the money.
“I looked at the people behind it and I attended the Blue Sky investor day where I could ask questions,” he says.
He likes the alternative assets held by the Blue Sky Alternatives Access Fund, which he holds inside his super fund, as it’s a good diversifier to the fund’s share holdings.