Funds on Offer TACKLING the HOT themes

Nov 25, 2007

Hot Themes Unit trusts investing in specific sectors such as agriculture, infrastructure, global climate and Islamic finance have captured the attention of investors.

EXPLODING population numbers, global warming, a boom in building roads, airports and telecoms networks. These are some of the exciting themes that have been packaged into investment funds and put on offer in Singapore. They offer investors an avenue to get a slice of the action of companies tackling these sorts of issues.

However, the past experiences of other thematic funds, such as the very popular technology funds of the late 1990s, show that they are not for the faint-hearted. Many investors who bought into such funds got burnt badly when the tech bubble burst in 2000.

Next came the so-called Bric (Brazil, Russia, India and China) funds in 2005, which generated much investor interest in these big emerging markets. In the past one year, investors have been bombarded with funds centred on agribusiness, climate change, infrastructure and Islamic finance.

Agribusiness

UNIT trusts based on the agribusiness theme invest in companies that operate at different points along the 'food chain'.

These can include cultivation, processing, distribution, agricultural machinery, food companies, logistics companies for transporting produce, banks that finance agribusinesses, and water companies.

Pros:
Population and income are two important factors underlying the demand for food and agricultural products, says Fundsupermart research manager Mah Ching Cheng.

According to data from the United Nations, the world population had risen to 6.51 billion in 2005 from 4.45 billion in 1980, up 46 per cent.

Ms Susan Soh, Schroders Singapore's managing director, says population growth in Asia is estimated to be 32 per cent over the next 45 years, which equates to roughly 1.3 billion new mouths to feed.

Cons:
Climate changes can affect food production and, thus, the earnings of firms in the sector.
IPP Financial Advisers investment director Albert Lam warns that the price of alternative bio-fuels, along with demand, will be dependent on crude oil prices.

'If price of crude oil falls, the demand for biofuels may fall, thus companies focusing on agricultural crops for the production of biofuels will be negatively affected,' he says.
Infrastructure

THESE are funds that invest in companies involved in construction, ports, transportation, telecoms and utilities such as electricity.

Asset management firm Lion Capital, which launched a Lion Capital Asia Infrastructure fund last year, says investments of nearly US$180 billion (S$260.7 billion) a year will be required for regional infrastructure projects.

For example, China will need to invest US$132 billion annually from last year to 2010 in new infrastructure assets and for the maintenance of existing facilities.

Pros:
Huge sums of money are expected to be spent by Asian governments on many ongoing infrastructure plans to build a better business infrastructure for these countries.

Cons:
Risks include slower-than-expected growth in infrastructure spending, execution risks of infrastructure projects and political and regulatory risks, says Lion Capital.

Global climate change
CLIMATE change funds invest in firms that have a direct impact on efforts to mitigate or adapt to climate change, such as low-energy and alternative vehicles and renewable energy sources such as solar power.

For example, DWS Global Climate Change Fund invests in global firms with profitable business models that have made substantial progress in seeking environmentally friendly solutions.

Pros:
Governments and world agencies are making huge investments to tackle climate change. It is estimated that globally, US$20 trillion will have to be spent on new energy infrastructure by 2030, says Ms Soh.

The most important factor driving many investments are international and national policy developments around climate change.

Government regulations and targets for greenhouse gas reduction, energy efficiency and clean energy are all driving investments into new technologies and providing a growth opportunity for well- positioned businesses, she added.

Cons:
Mr Lam says a climate-themed fund will be of higher risk compared to a global equity fund, as it is overweight in industrials, consumer discretionary spending and materials.

'These are cyclical industries. The exposure is also largely in Europe and the United States,' he says.

Another risk, Ms Mah adds, is any sudden change or reversal in government policy to channel subsidies away from environmentally friendly firms.

Islamic finance

ISLAMIC-THEMED funds can invest only in companies that are compliant with Islamic law, known as syariah.

For example, Islamic finance prohibits the payment and collection of interest on their financial activities. So. banks and financial institutions will be omitted from the universe of securities for such funds to invest in.

It also means that investments in firms that sell alcohol or are involved in gambling are forbidden.

Pros:
The increasing affluence of the Middle Eastern region is a positive growth driver for Islamic equity funds, says Ms Mah.

According to Capgemini, the number of high net-worth individuals in the Middle East grew 11.7 per cent last year and is forecast to grow 9.5 per cent annually from last year to 2011.
Cons:

Mr Lam believes Islamic- themed funds may be less diversified and restricted with regard to the securities that the funds can go into.

What financial advisers say
SOME financial advisers polled by The Sunday Times say they are not fans of thematic funds because they find them 'restrictive'.

Mr Chris Firth, chief executive of wealth management firm dollarDEX, likens such funds to going to a restaurant and only being able to choose dishes containing fish - of which some are good, but some are not.

Both Mr Firth and Mr Joseph Chong, chief executive of financial advisory firm New Independent, believe that these products are too much marketing-led rather than investment-led.

Says Mr Firth: 'I usually recommend zero allocation to them...From a risk-reward perspective, an Asian equity fund would usually outperform, for example, an Asian fund with a theme.

'This is because the broader fund can cherry-pick the best handful of theme stocks and ignore all the others that might be less attractive, whereas the theme fund has to go fully into the theme, including the not-so-attractive ones.'

Also, most good asset managers incorporate such trend developments in their portfolios, even if they are not managing thematic funds, says Mr Chong.

He points out that because of the lack of prior history and relevant performance benchmarks, returns and risk numbers of such funds are difficult to ascertain.

'In general, we do not recommend such funds. Investors can still make decent money without investing in them.

'Also, given the very specialist nature and newness of such funds, could we really get an experienced manager to steer them?' he adds.

Mr Lam highlights that thematic funds investing in agribusiness, infrastructure and Islamic finance will be of higher risk compared to a global equity fund, as the companies that a thematic fund can invest in are more limited.

However, an investor can consider having up to 20 per cent of his investments in theme funds, which gives him the possibility of higher returns as the associated risk is higher, he says.

This assumes that the investor has a moderate risk appetite and is on a regular savings programme, where 80 per cent of his investments are in funds that are more broad-based in their investment mandate, for example a global equity fund.

Among the thematic funds currently available, Mr Vasu Menon, OCBC Bank's vice- president of group wealth management, believes that the themes of agribusiness and infrastructure 'are likely to continue for many more years'.

This is because of the growing demand for soft commodities from booming economies such as China and India, and a significant amount of funds being spent by governments in Asia to support promising growth prospects through infrastructure development.

Mr William Barbour, Deutsche Asset Management's director, is confident that both agribusiness and climate change funds are capable of beating the Morgan Stanley Capital International (MSCI) index for at least the next four to five years.

From Sept 16 last year to Oct 11 this year, the DWS Invest Global Agribusiness (USD) fund was up 45 per cent against the MSCI's 26.4 per cent.