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Top 100 Funds 2020: Specialist equity funds

Our suggestions for sector specific equity exposure
Top 100 Funds 2020: Specialist equity funds

If you have a large portfolio and a higher risk appetite, you could consider adding a small allocation to some specialist equities funds focused on a particular area that could benefit from high growth. We have funds focused on infrastructure, environmental services, healthcare, technology, financials and commodity company equities. If you want exposure to physical assets have a look at the IC Top 50 ETFs for funds that hold metals such as gold (last published on 12 June 2020), or the alternative assets and property sections of the IC Top 100 Funds.

 

SRI OPTION: Impax Environmental Markets (IEM)

Impax Environmental Markets aims for sustainable, above-market returns over the longer term by investing globally in companies involved in resource efficiency and environmental markets. The trust’s managers, Jon Forster, Bruce Jenkyn-Jones and Fotis Chatzimichalakis, invest in small and mid-cap companies that make 50 per cent of their revenue from environmental products or services in the energy efficiency, renewable energy, water, waste and sustainable food and agriculture markets.

The trust is mainly invested in developed markets, with 41 per cent of its assets in North America and37 per cent in Europe at the end of July.

Despite its specialist focus, the trust has a good record of beating broad global indices such as the FTSE World and MSCI World, and conventional global equities investment trusts. And it has held up well against these indices over the first seven months of the year amid the recent volatility.

However, over the year to 31 July, Impax Environmental Markets underperformed the FTSE ET Index, which measures the performance of companies whose core business is the development and deployment of environmental technologies. This is because the trust does not hold electric car maker Tesla (US: TSLA), which accounted for over 10 per cent of this index as of early August. The managers do not invest in Tesla due to concerns about valuation and poor governance.

In January 2019, the trust’s board adopted a zero-discount policy and more recently has made a number of share issues to help control the premium to NAV.

 

First State Global Listed Infrastructure (GB00B24HK556)

First State Global Listed Infrastructure targets inflation-protected income and steady capital growth from real assets delivering essential services. It gets exposure to these by investing in the shares of companies in areas including water and electric utilities, highways and railways, oil and gas storage, and transportation. The fund’s investment team mainly focuses on infrastructure assets that exhibit barriers to entry, structural growth and pricing power. And they aim to invest in quality companies trading at a discount to their estimate of intrinsic value.

Infrastructure securities can make smoother returns than the broader share market during periods of higher market volatility. This is because essential services such as water, power and transportation tend to have stable cash flows and are relatively immune to economic cycles. In down years this fund has proved to be more defensive than broader global equity indices. For example, in 2018 the fund fell 1.64 per cent while the MSCI AC World index fell 3.04 per cent and the Investment Association (IA) Global sector average return was a fall of 5.72 per cent. However, the fund can also go through periods of volatility, such as over the first eight months of this year.

The fund’s management team of eight infrastructure specialists is led by Peter Meany, head of global listed infrastructure at First State Investments, who is based in Sydney.

Unlike many listed broad infrastructure funds, First State Global Listed Infrastructure is not focused on the UK, where it had only 5.3 per cent of its assets at the end of July. Over half its assets were listed in the US, with 8.6 per cent in Australia and 5.4 per cent in France. Most of the rest are in developed countries.

 

Worldwide Healthcare Trust (WWH)

Worldwide Healthcare Trust invests in both the healthcare and higher-return, higher-risk biotechnology sector. So while it offers some exposure to high-growth areas, it is less risky than biotech-focused funds. 

It can invest in various types of healthcare companies, including those that produce patented speciality medicines for small patient populations, and unpatented generic drugs in developed and emerging markets. It also invests in medical device technologies, life science tools and healthcare services.

The trust is run by OrbiMed Capital, a dedicated healthcare investment company founded in 1989 that employs over 80 investment professionals. The trust’s managers are Sven Borho, founder and managing partner, and Trevor Polischuk, partner, at OrbiMed. They seek sources of outperformance in areas such as therapeutics. Clinical events such as the publication of new clinical trial data can provide this and historically it has been the largest source of share price volatility. Regulatory events, such as new drug approvals by US, European and Japanese regulatory authorities are also stock moving events. Other sources include legal events, and mergers and acquisitions.

The trust’s managers particularly like to invest in companies with underappreciated products in the pipeline, high-quality management teams and adequate financial resources. They also try to moderate portfolio volatility via a rigorous risk management process.

Although Worldwide Healthcare Trust can invest globally, it had 62 per cent of its assets in North America at the end of July, and 21 per cent in emerging markets. 

The trust can invest up to 10 per cent of its assets in unquoted securities but these only accounted for 1.3 per cent of its assets at the end of July. 

The trust has a good record of outperforming the MSCI World Health Care index.

 

International Biotechnology Trust (IBT)

International Biotechnology Trust invests in companies that its investment team thinks have fast growth prospects, and often operate at the cutting edge of medical science. The team looks for companies developing or commercialising pharmaceutical products, devices and enabling technologies.

The trust’s lead manager, Carl Harald Janson, is a qualified medical doctor who has run it since September 2013. While he tends to select companies on the basis of their own merits, he particularly likes therapeutics companies because ageing populations and scientific advancements are boosting demand for new drugs.

Companies developing treatments for rare diseases form the largest sub-sector in the fund, accounting for 30 per cent of its assets at the end of July. The managers like this field because there is much less pressure on pricing than in other biotech areas. The trust’s managers look to invest in companies that have completed clinical trials for drugs so do not carry clinical risk.

The trust holds large, mid and small-cap companies primarily quoted on stock exchanges in North America.

The trust can also invest in unquoted companies and had 12 per cent of its assets in these at the end of July, differentiating it from a number of other biotech funds. The unquoted exposure is mainly accessed via a venture fund run by SV Health Investors, the company where Dr Janson and his team work. Dr Janson says that the trust does not make direct new investments into unquoted companies because they are hard to buy and sell.

It had net assets of £280m at the end of August, and its NAV returns had beaten the Nasdaq Biotechnology index over one, three and five years. The trust pays a dividend of 4 per cent of its NAV each year from capital so that its managers can pursue a growth-orientated investment strategy. If you are a growth investor you could reinvest the dividends. MM

 

Polar Capital Technology Trust (PCT)

Polar Capital Technology trust invests in more than 100 companies around the world that use technology, or develop and supply technological solutions as a core part of their business. Set up in 1996, the trust’s total net assets had grown to over £2.8bn as at 31 July 2020. It has outperformed its benchmark, the Dow Jones World Technology index, over one, three and five years.

The trust’s investment team, led by Ben Rogoff, has a thematic investment approach that involves investing in companies in fast-growing areas of technology such as software-as-a-service, 5G, artificial intelligence, cloud computing and e-commerce.

The trust is managed with a low active share of 40 to 50 per cent, which means typically 50 to 60 per cent of what it holds are constituents of its benchmark index. Mr Rogoff says this enables him to consistently meet his target of outperforming the benchmark by 2 to 3 per cent each year.

Mr Rogoff also argues that having loyalty to the benchmark spurs him to buy small positions included in the index that he might not have otherwise, some of which go on to have outstanding performance. As at 31 July 2020, Apple (US:AAPL), Microsoft (US:MSFT) and Alphabet (US:GOOGL) made up nearly one quarter of the trust.

Most of the companies in the trust are listed in the US, where the fund had 71 per cent of its assets at the end of July 2020, with 14.6 per cent in Asia Pacific, 5.4 per cent in Japan and 4.4 per cent in Europe (ex UK).

The trust’s investment team does not invest in unlisted companies because they value the ability to buy and sell assets quickly. Mr Rogoff says liquidity is “absolutely paramount” for the trust, as technology change can happen rapidly and in unpredictable ways. MM

 

Allianz Technology Trust (ATT)

Allianz Technology Trust aims for long-term growth by investing in technology companies. Its managers try to identify major trends ahead of the crowd and invest in stocks that have the potential to be tomorrow’s Apple, Google or Microsoft. So the trust tends to be overweight high-growth mid-cap companies and underweight in mega-cap companies, relative to the Dow Jones World Technology Index. 

Its managers want to invest in companies that will benefit from the continued growth in particular sub-sectors of technology, especially ones that provide solutions to help save money, or improve relationships with customers and deliver revenue growth. They also seek to hold companies that will create shareholder value with the introduction of a new product or technology. 

The trust’s investment team is led by Walter Price, co-head of the AllianzGI global technology team, who has over 40 years’ experience of investing in technology. They are based near Silicon Valley where many technology companies are headquartered.

Although the trust can invest globally, and does not target country or regional weightings, it had about 90 per cent of its assets in North America at the end of July. 

The trust has a very strong record of outperforming the Dow Jones Global Technology index and other tech funds. A downside to the trust is its performance fee, which can make its ongoing charge considerably higher. This was not charged in 2019 but, for example, in 2018 it took its ongoing charge up from 0.91 per cent to 2.05 per cent. However, in years when it is charged investors are well compensated with strong returns.

The trust’s basic fee, meanwhile, has been amended. Prior to this year, it charged 0.8 per cent of market capitalisation up to £400m and 0.6 per cent on any market capitalisation above that. But since January the trust has charged 0.8 per cent for any market capitalisation up to £400m, 0.6 per cent for any market capitalisation between £400m and £1bn, and 0.5 per cent for any market capitalisation over £1bn. The trust had a market cap of £1.02bn at the end of August.

 

Jupiter Financial Opportunities (GB00B5LG4657)

Guy de Blonay has run Jupiter Financial Opportunities since January 2011. He looks to invest in companies with favourable growth prospects due to factors such as proven managements, or strong products and services. He likes companies that could benefit from promising trends or themes within their sectors, of which the current share price doesn’t seem to reflect their full potential.

The fund invests in various types of companies rather than just banks and insurance companies. For example, at the end of July, support services accounted for 24.2 per cent of its assets, software and computer services accounted for 17.9 per cent, and general retailers 4.8 per cent. It is underweight traditional financial services companies relative to the MSCI ACWI Financials index because Mr De Blonay avoids such companies with unsustainable business models. He prefers to invest in banks and insurers that embrace certain digital transformation trends. 

The fund is mainly invested in developed markets, and at the end of July North America accounted for 56.9 per cent of its assets and Europe ex UK 20.9 per cent.

When choosing investments, Mr De Blonay combines analysis of the wider economic picture with detailed research into individual companies. His investment process includes meetings with company managements, analysing the quality of a company’s earnings and challenging the consensus view on a company’s prospects. He then monitors and adjusts the balance of the fund’s geographic and sub-sector investments where necessary if market circumstances change.

Jupiter Financial Opportunities has a good record of beating the MSCI ACWI Financials index.

 

Polar Capital Global Insurance (IE00B61MW553)

Insurance company equities can be a good way to diversify the equity portion of your portfolio as they can be more defensive than the broader market. And Polar Capital Global Insurance Fund has proved its worth in this respect. For example, in 2018 and in 2011, when the MSCI World index made negative returns, the fund made positive returns.

Polar Capital Global Insurance’s manager, Nick Martin, invests in 30 to 35 underwriting specialists that offer a level of diversification from each other. He balances the fund’s composition to particular classes of business, such as premium rates, terms and conditions, and loss activity change. He tries to invest in proven best-in-class companies. This leads him to companies that have more focused underwriting strategies, and whose managements have a meaningful ownership stake and are incentivised to grow book value per share and dividends over time. Mr Martin and his team think that this drives share price performance over the long term.

The fund’s investment team do their own analysis and research. They place great importance on meeting companies’ managers because insurance is a promise to pay, so an assessment of management integrity is a key part of their investment process.

Mr Martin has worked on the fund since 2001 and became lead manager in 2016. 

The fund invests in various insurance sub-sectors, although typically does not invest much in life assurers as its managers prefer specialist non-life, casualty and risk sector companies. Although it has a global remit, at the end of July 70.2 per cent of its assets were invested in the US and 16.8 per cent in the UK.

Polar Capital Global Insurance has performed well against its benchmark, the MSCI World Insurance index, over longer periods and in many years beats mainstream global equity indices such as MSCI World.

 

BlackRock World Mining Trust (BRWM)

BlackRock World Mining Trust invests mainly in the shares of mining companies involved with a range of materials, and has significant exposure to gold and copper. Up to 10 per cent of its gross assets may be held in physical metals and up to 20 per cent in unlisted investments. The exposure to gold means that over the long term an investment in the trust could help to hedge against inflation and diversify investment portfolios.

The trust’s managers believe that the mining sector will benefit from a rise in green spending, with certain commodities likely to see strong demand. So it has around a third of its assets in commodities such as cobalt and lithium, which are used to make batteries for electric cars. And nearly 18 per cent of its assets are allocated to copper, which looks set to benefit from the decline in fossil fuels. Increased infrastructure spending, particularly in China, could also provide a tailwind.

However, mining company equities are highly cyclical and any setbacks in the global recovery could result in the trust being volatile. 

The trust has underperformed its benchmark, the EMIX Global Mining index, in the past two calendar years and over the first eight months of this year. But its policy of distributing a substantial amount of the income it has available means that it offered a yield of 5.5 per cent at the end of August. It has paid dividends worth 8p in respect of the first half of this year – the same level as in 2019. The trust does not have a progressive dividend policy, but does have revenue reserves of £41.12m – enough to maintain current dividend payments for just over a year, protecting against any potential shortfall. 

The trust has been run by Evy Hambro since September 2000 and Olivia Markham since April 2015. MM

 

Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)Ongoing charge plus any performance fee (%)Morningstar Sustainability Rating
Impax Environmental Markets share price12.4 26.9 113.4 1.02* 
MSCI AC World index6.0 24.6 86.8   
First State Global Listed Infrastructure(13.2)3.1 62.6 0.79Below Average
S&P Global Infrastructure index(17.5)(6.6)43.3   
Worldwide Healthcare Trust share price24.6 36.8 81.9 0.88* 
MSCI World/Health Care index11.3 33.9 75.2   
International Biotechnology Trust share price22.3 25.1 48.9 1.68* 
NASDAQ Biotechnology index20.6 19.4 40.2   
Allianz Technology Trust share price48.4 123.8 312.8 0.92* 
Polar Capital Technology Trust share price43.8 105.2 288.9 0.99* 
MSCI World/Information Technology index40.5 101.9 263.4   
Jupiter Financial Opportunities 5.1 33.9 83.3 0.98High
Polar Capital Global Insurance (13.2)12.9 72.1 0.88Average
MSCI World/Financials index(13.5)(8.5)37.2   
BlackRock World Mining Trust share price18.1 20.9 143.8 1.02* 
S&P Global Natural Resources index(10.7)(3.9)50.9   

Source: Morningstar, *AIC.                    

Performance data as at 31 August 2020.                    

**Data shown is for a different share class to the one indicated in the text                    

 

For all our selections across various sectors, see below:

Bonds (12 funds)

Wealth preservation (7 funds)

Global equity income (4 funds)

Overseas equity income (6 funds)

UK equity income (8 funds)

Global growth (9 funds)

UK equity growth (8 funds)

North America (4 funds)

Europe (6 funds)

Japan (5 funds)

Asia ex-Japan (6 funds)

Emerging markets (6 funds)

Specialist equity funds (9 funds)

Alternative assets (6 funds)

Property (4 funds)