With deposit rates still extremely low, many investors have noted the rebound in stock markets this year and have started to invest in equities again.
It can be expensive to build up a portfolio of individual shares when you take commissions and stamp duty into account. For many, the nearest thing to having your private portfolio for a much smaller cost is to buy a specialist fund.
These specialist or focused funds have become very popular in recent years as fund managers try to show off their stock picking skills.
First introduced by Canada Life through their popular Focus 15 fund, most insurance companies now offer these specialist funds.
These funds have limited stockholdings - usually from 15 to 30 - compared to the traditional managed funds where more than 200 different stocks in the portfolio is not uncommon.
Specialists funds are an aggressive product allowing the fund manager to trade more often and since they have a limited number of holdings, selection is much more important.
It also acknowledges the fact that most of the gains on managed funds come from a few of the holdings so that by eliminating the distraction of a large portion of the non-performing stocks, the returns should improve.
There are now a number of these specialist funds open to investors. The accompanying table shows a selection of these funds along with the minimum investment amount and the annual management charge.
Specialist funds have a role to play as part of a diversified portfolio. Even though they are a high-risk investment, the investor is betting that the professional fund manager should beat the market average and index returns.
In addition, since the holdings are limited, many companies will disclose the stocks they actually hold, making them more transparent and interesting to the investor.
For example Canada Life sends a monthly update to investors on its Focus 15 fund and other companies such as Eagle Star display the fund holdings on websites.
For many investors, this is like having their own personal portfolio, at a fraction of the cost of buying the individual shares. Increased transparency has become an important consideration for investors, both on the fund holdings and on the fund charges and expenses.
With a larger selection of these funds on the market today, the selection process has become more complicated. The table above also shows the year-to-date returns of a selection of these specialist funds.
Over the same timeframe the Nasdaq is up 44.7 per cent in local currency terms, the FTSE is up 8.8 per cent, the ISEQ is up 19.3 per cent and the Dow Jones is up 17.5 per cent. While it is easy to be critical in hindsight, the goal for these funds must be to beat the overall market - after all that is what the investor is paying those management fees for.
Investors should monitor the recent performance of these funds (especially if there has been a change in fund manager) rather than the three- and five-year past performance. Investors are giving these managers a chance to show how good their stock selection skills are so long-term performance is not as relevant here.
After all if a stock fails to perform as expected, then the manager should get rid of it just as they will sell a stock they feel has reached its target price.
The holdings should be constantly under review, with share price performance being the sole criteria to maintaining the holding in the portfolio. Taking care of these short-term goals will convert to good long-term performance. Most investors do not have the time to devote to stock research and selection. Investing in one of these funds, provides a mini portfolio and since the companies are publishing fund holdings, it allows investors to track those holdings and get an idea of how their fund is performing.
They can then grade the performance of the manager.
Tice O'Sullivan is a financial adviser with Primafinance.ie
