The Briefing: Specialist sector

You can liken the Investment Management Association's (IMA) Specialist sector to a cupboard under the stairs. While it will be packed full of interesting and unrelated objects that might be useful now or in the future, there will also be plenty of other items lurking in there that are best left alone.   Its aim is to provide a home for funds with investment universes that aren't accommodated by any of the mainstream sectors, such as IMA UK All Companies or IMA Global, according to Geoff Penrice, a charted financial planner at Astute Financial Management."There is a real hotchpotch of funds including energy, alternatives, frontier markets, agriculture, convertibles, biotech, health, financials and commodities," he explains. "It is a useful catch-all for funds that have no logical place elsewhere."

Unsurprisingly, given the fact they are pursuing different goals and will be affected by a variety of economic and market-specific factors, performance comparisons between funds in this sector are also pretty meaningless. Each one, therefore, has to be considered on its own merits. A look at the statistics illustrates the point.

To find out about a fund for adventurous investors seeking to exploit India's exciting long-term growth prospects, read:Fund to watch: Jupiter India fund.

Is this the right sector for me?

Consider investing in this sector if...

• you are looking for exposure to certain assets or regions.
• you want to add some satellite positions to your core holdings.
• you are keen to diversify your portfolio.

While the best-performing fund over the past three years has been AXA Framlington Biotech with a staggering 161.69% return, according to Morningstar data to 4 March 2014, the worst - SF t1ps Smaller Companies Gold - was down 82.89%. Sometimes these performances are due to particular areas being in, or out, of favour. For example, over that three-year period it's clear that precious metals and natural resources have been among the least successful areas, while biotechnology and healthcare have done very well. This makes it a potential minefield, warns Brian Dennehy, managing director of FundExpert.co.uk. "It's certainly a fascinating sector, full of opportunity, but also full of risk," he says. "Investors need to be wary of buying a fund because they think it's cheap as this is like catching a falling knife." A widely held view within the industry is that there are too many funds in Specialist - more than 200 at the last count - but the problem is finding a solution. Neither alternative - forcing funds into existing sectors or creating new ones each containing a handful of funds - is viable. Therefore the current situation is likely to remain for the foreseeable future.

Satellite sectors

The challenge for investors and advisers is to understand exactly what they are investing in. So who would benefit from having exposure to this sector and how should it be used? It's clear that the way to use Specialist differs from one of the other sectors where all the portfolios will pursue the same broad goals with the main differences being how they go about it. This makes it far easier to select a suitable fund.

Before investing in a fund from this area, however, an investor must have a much better idea of what they want to buy.

In most cases, they will be looking to cherry-pick particular funds that can enhance the returns being generated by the core of the portfolio. These are known as satellite investments as they are on the edge of a core portfolio. For example, an investor might want most of his money in UK companies but at the same time have specific exposure to an area such as gold or a geographical region like Russia.

Broadly speaking, the sector can be divided into around 20 main areas, including Latin America, Africa equity, Korea, convertible bonds, infrastructure, financial services, biotech, healthcare and ecology. A thorough understanding of their various aims and objectives will be essential.

Health is a bit of a lottery - it has been storming for a year or two but can turn on a sixpence"Brian Dennehy

For example, the likes of Artemis Global Energy and JPM Natural Resources funds sit happily alongside Baring Eastern Europe and Jupiter India - in the same sector. In addition, investors need to accept that the economic situation within regions, export market instability, the demand for certain products, political unrest, and financial concerns can impact on various sectors. So before committing their money, investors will need to have done their research. Brian Dennehy, for example, believes you can unearth interesting opportunities. "There are some fascinating single country funds with India being a favourite for long-term investors," he says. "Health is a bit of a lottery - it has been storming for a year or two but can turn on a sixpence." Many financial advisers remain cautious about using Specialist. For instance, Patrick Connolly, a certified financial planner with Chase de Vere, says very few funds are used from this sector, although he admits they can sometimes serve a useful purpose.

"Where we do use these funds, it is when a client is keen to take more risk in their portfolio or wants exposure to a particular area, which is difficult to get elsewhere," he explains. "Most of our clients won't hold high-risk niche funds but some do as a small, riskier part of their overall portfolio."