Trend in mutuals favours 'concepts', not regions The mutual fund industry is somewhat like the fashion business - it's always looking for a new trend to attract buyers' eyes. During the bearish years of the early 2000s, the market was flooded with guaranteed funds. In the past two years it has turned to emerging-market funds, following high-growth stories there. After the subprime crisis hit global markets in the middle of last year, fund houses quickly found they could no longer easily sell equity or single-country funds. Now the trend is theme funds based on 'concepts', such as environmental protection, social responsibility or resources. Leading funds houses - including big names like Schroders, JF Asset Management, Pictet Asset Management, RCM, Deutsche and HSBC - have launched, or will launch, theme funds. They don't invest in a particular country or region, but in a pool of stocks with certain themes or common characteristics. JF Asset Management is offering the JF Five Elements Fund until April 18. It is open-ended and centred around the five major traditional elements: metal, wood, water, fire and earth. The fund invests in a portfolio of 40 to 55 stocks having to do with domestic consumption, such as steel, paper, timber, water treatment, power, oil, coal and soft commodities like corn, soya and rice. Terry Pan, JF Asset Management's head of retail business, said that as Hong Kong fund markets had become more mature and sophisticated, it was natural for fund houses to shift from traditional geographic concepts to different themes. 'JF has already launched a range of global, regional and single-country funds,' he said. 'It is difficult for us to develop more new funds based on a single country. 'The five key elements are commonly known in Asia,' Mr Pan said. 'But I can assure you that it is not just a good marketing package. Our fund mangers will choose stocks that can deliver good returns to investors.' Amy Cho, managing director and regional head of the Asia Pacific division of Pictet Funds, agreed that theme funds are not just a gimmick. Pictet Funds, wholly owned by Swiss private banker Pictet & Cie, has been a pioneer in launching theme funds, starting in the 1990s in overseas markets. Last month it launched six theme funds for local retail investors, focusing on socio-economic issues: clean energy, biotech, security, telecoms and premium brands. 'Our theme funds are global equities funds with a specific focus,' she said. 'We have had some of these funds since 1995 and they have a total asset size of more than US$9 billion. If the funds could not perform, how could we build up such assets?' Ms Cho said the biotech fund, launched in 1995, had reported a 49.1 per cent growth rate for the past three years. 'Investors should understand the specific objective of the theme funds, some of which are more transparent and easier to understand than global funds,'' she said. Mark Konyn, chief executive of the Asia division of RCM, said investors had a strong interest in theme funds. The company has a global EcoTrend fund investing in energy and telecoms stocks. 'Increasingly, certain global investment or economic trends have developed that need a wider consideration,' he said. 'These themes, by definition, transcend national boundaries and have attracted significant interest. They capture the willingness of investors to rate more highly companies operating in these segments of the global economy.' But Mr Konyn warned about the risks involved in these products. 'A potential risk is that these themes could be 'crowded out' as too much money chases too small an opportunity,' he said. 'In such situations, capacity could limit the sustainability of the investment theme. Investors should seek to understand the sustainability of each theme and how managers manage capacity.' JF's Mr Pan said the Five Elements fund would be suitable for investors who could accept a medium to high level of risk. 'The theme funds invest in stocks with a particular theme, which means they cannot be fully diversified,' he said. 'The Five Elements Fund, for example, will invest in only about 50 stocks. Investors should understand the risk factors before putting their money into the products.' Mr Pan believes theme funds will become permanent features of the market. Pictet's Ms Cho thinks environmental issues will be a major theme because of widespread concerns about pollution and climate change. Schroders issued a climate-related fund last year, and HSBC followed earlier this year, while Deutsche Asset Management is going to launch the Invest Climate Change Fund tomorrow. While Deutsche has not yet announced details of its fund, Schroders' climate fund is investing in companies that help protect the environment and prevent global warming, such as environmentally friendly air-conditioning firms. 'We believe our global climate-change equity fund to be a long-term, core investment proposition,' said Lieven Debruyne, chief executive at Schroder Investment Management in Hong Kong. 'When we launched our Global Climate Change Equity fund in Hong Kong last year, we were the first to truly address this theme from an investment point of view,' he said. 'Today, the fund is outperforming the market.' Besides climate change, food may be another popular theme due to rising food prices. This prompted Deutsche last June to launch its Global Agribusiness Fund. 'Agribusiness investment is the global mega trend,' said Bill Barbour, senior investment specialist at Deutsche Asset Management. 'Global population is soaring. particularly in Asia, driving robust demand for food.'' Independent financial adviser David Bellingham, chief executive of ING Financial Planning, said environmental issues were a problem around the globe. 'There is a lot of money being spent on the environment, and a lot of research is being done to improve current technologies. As the environment is an ongoing concern, we do not envisage this spending drying up any time soon, which is why we believe the sector will perform well going forward.'