Niche funds take your investments from vanilla to interesting
Have you ever considered investing in robots, water, electric cars or even moonshots innovation? The future is here.
Themed investing is becoming easier thanks to the launch of more funds that track niches and themes such as football stocks, robotics, cryptocurrency or even 3D printing.
Even here in New Zealand we’re seeing niche funds becoming available. Smartshares, for example, sells an Automation and Robotics fund. Kernel Wealth offers the intriguing S&P Kensho Moonshots Innovation fund, which includes 50 of the most innovative Us-listed companies, including Virgin Galactic Holdings, irobot and others.
The growth of themed investing means you can take a punt on innovative and exiting investments that interest you personally. They may have considerable potential for capital gain, although beware they will tend to be more volatile than more boring investments.
It’s not as focused or risky as individual stock-picking, but more interest that a vanilla-flavoured broad-range fund.
Themed funds allow you to invest in niches such as electric vehicle innovation, says Kernel’s chief executive, Dean Anderson, but spread that risk over multiple companies rather than invest in simply Tesla.
Many new themes are associated with macro long-term trends, such as climate change and the aging population, says fund manager John Berry of Pathfinder Asset Management.
Financial adviser Liz Koh, of Enrich Retirement, says niche investments are usually an add-on to a more general investment portfolio.
This does what’s technically called “tilting” your portfolio from generic to something a little more interesting.
Water funds are a theme that has been around a while now and appeals to some investors who see the growth opportunity.
The best known water fund from a New Zealand provider is Pathfinder’s Global Water Fund.
Water is essential for life, yet less than 0.01 per cent of the world’s water is sustainable and accessible. The fund invests directly in international technology, utility or industrial companies involved in water that all score highly on ethical factors.
Like other themes, says Berry, an investment in water is typically a satellite of the investor’s main portfolio. The investment needs to be “right sized” as part of an overall portfolio, says Berry. He says many investors come through platforms such as Sharesies and Investnow, but financial advisers also recommend it to clients as a growth option.
Koh sees the possibility for individual investors to forgo the standard vanilla portfolio and create a still diversified portfolio with investments in maybe 20 different funds.
It’s not an approach she has recommended to clients, but with the growth of these new funds it’s one that could work for some investors.
“What you can do is construct your own diversified portfolio using quite specific funds as opposed to going into a generic passive fund that just follows the S&P 500.
“I, an investor, will pick 20 different niche funds,” says Koh. “That way I get my diversification. But I’m also doing something that’s akin to stock picking but it’s not at that level of detail,” she says.
Koh also sees a potential future where instead of individual stockpicking, fund managers and model portfolios can differentiate their offerings from more mainstream providers by incorporating these new themes. “It becomes more about picking the niche funds as opposed to picking the stock.”
A word of warning. Investing too much of your portfolio in one single niche is akin to betting. That’s what happened to dotcom investors back in the early 2000s. The internet was hot, and investors believed it was a licence to print money. It wasn’t.
Dotcom stocks went rogue. They were selling for many times what they would be worth in a normal market, and they came crashing right down to earth.
Having said that, if your niche investments are well diversified it’s unlikely they’re all going to head south at the same time unless there is a bigger force such as the GFC did that takes them all with it.