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SCMP Reporter

The South China Morning Post  Fund Manager of the Year Award 2000 will be announced on Wednesday. As part of an ongoing series on future trends in fund investing, this week we look at popular sector funds.

February is usually a busy month for fund houses. It is the time for new fund launches after investors and fund houses return from their Lunar New Year holidays.

It is no different this year, with sector funds being the flavour of the month for retail investors.

According to the Securities and Futures Commission, the number of sector funds authorised in Hong Kong increased threefold to about 60 in the 12 months to January.

More than 20 sector funds have been launched this month.

Some of these cover logistics, technology, financial services, life sciences, fibre optics and the retail sector.

'Among the newly authorised funds, there is an increasing percentage of sector-focused funds,' says Sally Wong, executive director of Hong Kong Investment Funds Association.

Ms Wong says sector funds are usually seen as a way for investors to capitalise on the long-term growth potential that comes with the change in the equity investment scene.

'The number of sector funds has increased over the last two years and it is still growing,' says Tian Shum, head of retail sales at Invesco Asia, which has launched three funds this month, two of which are sector funds in financial services and the energy industry.

Fund managers say globalisation and the reduced correlation among sectors have led to this global sector funds trend.

'Their businesses are all over the world and they have their own regime to work on,' Ms Shum says.

'The sectors will become even more specific. The popular funds are still in the technology and health-care areas. But there are other funds such as gold, real estate and natural resources that are still very rare here compared with the mature markets in the United States and Europe.'

Ms Shum says the advantage of a single-sector fund is the fact it is so focused. If you believe in a sector, just focus on that one sector.

Peter Woo, head of the asset management division at investment consulting firm Towry Law International, says: 'This year we have more choices. Last year, people were investing in many Asian technology funds and biotech. Now we have financial services, energy and natural resources.'

Financial advisers say technology is still one of the key sectors, while another upcoming popular sector to invest in is financial services, which makes up 20 per cent of the world economy today.

'The declining interest-rate cycle will help banks and insurance companies perform better,' Ms Shum says. 'There is also the inevitable course of e-banking that banks are taking, which will help them reduce their costs. These two factors will be beneficial to the growth of the sector.'

Invesco sees prospects for growth in the energy resources sector, and notes that the long-term trends of energy supply and demand suggest a multi-year expansion cycle is evolving in the industry.

Price increases in the market will further encourage the industry to expand investment in oil services, drilling, exploration firms and natural gas companies, Invesco suggests.

Given the higher volatility and risk involved in sector funds, Ms Shum says: 'When we propose sector funds, we recommend only 10 to 15 per cent of the portfolio be placed in these specialised funds.'

Says Carol Wong, head of investment fund services and vice-president of ABN Amro Asset Management: 'Investors should take note if the sector is also restricted regionally, making it less flexible than a global sector fund.'

Ms Wong also says that investors tend to look at the absolute return of a fund when making choices rather than the risk-adjusted return, which also takes into account the volatility of the fund.

'They seldom take into account the volatility of the fund. Risk-adjusted returns will show how volatile the fund is. We prefer a consistent performance in our fund,' she says.

Ms Wong says ABN Amro has introduced many new sector funds, with Global Life Society and Global Resources two of the most outstanding. The latter earned more than 30 per cent last year, a year of carnage for most funds.

Mr Woo says investors in the US and Europe hold more diversified portfolios than those in Hong Kong. 'In those countries, people hold investments in bonds, equities and cash. In Hong Kong, they either put a huge sum in cash or equity,' he says.

Helena Ng, executive director at financial planners Harris Fraser, says: 'If investors can bear a higher risk than investing in country and regional funds, then they should go for sector funds.'

As single-sector funds involve higher volatility, the new funds include a growing number of multi-sector ones, which invest in more than one area so that there is a better spread of risk.

Invesco's World Dynamic Theme Fund focuses on six sectors.

Baring Asset Management last week globally launched the five-sector Leading Sector Fund, which invests in technology, health-care, telecoms, technology and media.

Fund allocation is based on the MSCI index, says Self Li, head of Mutual Funds Sales at Baring Asset Management.

'We have feedback from distributors that Hong Kong investors are moving away from individual-sector funds as they find it hard to identify the winner of so many sectors,' Mr Li says. 'Hence we pool the sectors together to provide more diversification.'

Mr Woo, of Towry Law, says: 'Investors now have more choices in the sectors as well as more diversified multi-sector funds which are suitable for lower-risk investors.'

Graphic: fmanglo



Sector funds lure intrepid investors