Fund Focus: five ‘niche’ trust sectors with good returns

Sometimes, with a bit of luck and a bit of patience, a market we might have written off comes good. Let me point you to the recent resurgence of emerging market equities, which have previously had quite the unsatisfying decade.

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Another obvious example might be more familiar to readers: the FTSE 100 has enjoyed a strong run in recent years, coming off the back of a long spell out of favour. Fund flow data (plus merger and acquisition activity) suggests the UK market is still both cheap and unloved, but performance has certainly come through in the large-cap space.

All this helps to make the point that markets you may have written off – or overlooked entirely – can deliver strong returns at times, even if they are short-lived. That makes it important to have a bit of exposure to everything, rather than just piling into one market, where possible.

I should stress that there’s no guarantee such trends will continue. 

But a look at five-year returns from different Association of Investment Companies’ (AIC) sectors - excluding the mainstream equity categories - shows that bursts of decent performance have come from other pockets of the investment universe, too.

You might not want such exposure, but it at least shows us some of the varied options out there.

From ships to commodities

The gold price had an aggressively strong run up until early this year. That, combined with broader interest for commodities, has left the AIC’s Commodities and Natural Resources sector on some strong average gains over five years.

The sector has run into some trouble since the onset of conflict in the Middle East, and funds here have had very mixed fortunes. 

But names like (Saba survivor) CQS Natural Resources G&I Ord (LSE:CYN) have had a strong showing. 

• Ian Cowie: my new investment that has nothing to do with AI
• Copper outshines gold in boost for FTSE 250 miner

Commodities do retain some appeal if you worry, for example, about another wave of inflation. 

And the options are not limited to investment trusts, what with products like the Invesco Bloomberg Commodity ETF GBP (LSE:CMOP) in existence.

Source: FE Analytics. Past performance is not a guide to future performance.

There’s a good argument that commodities always have a place in portfolios as one way to diversify. But our table throws up some more niche options too.

Take, for example, the Leasing sector. This group now consists of just two names, DP Aircraft I Ord (LSE:DPA) and Tufton Assets Ord (LSE:SHIP), which are very granular investments. 

These can do very well at the right moment – as we saw with the ship leasing play when investors worried about the Strait of Hormuz closing. Its shares have returned almost 24% over six months.

• How to navigate extreme valuations
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

It should be stressed again that these are very niche, potentially very volatile portfolios, and that it can be worth researching and understanding the investment case and the factors that may affect performance. 

But investors with extremely well-diversified portfolios might be tempted to consider such names as satellite positions, or as interesting “special situations” investments.

Alternatives and beyond

We can get even more niche if we progress down the table. 

Think of the Debt – Structured Finance sector, home to the popular TwentyFour Income Ord (LSE:TFIF) as well as Fair Oaks Income 2021 Ord (LSE:FAIR), which has revised its dividend policy but once offered monster yields.

These funds can invest in some esoteric assets and are not the easiest to understand. 

TwentyFour Income’s portfolio includes collaterised loan obligations (CLOs), residential mortgage-backed securities (RMBs) and auto loans among other things. To explain one of these, a CLO is an instrument that packages up corporate loans with a lower credit quality rating for investors.

This in theory gives you higher returns in exchange for potentially higher risk. 

TwentyFour Income has performed well in recent years in addition to offering a chunky dividend yield, but this is an esoteric offering with real risks.

Niche or not?

The funds and sectors that we view as core or satellite change over time, and regions drift in and out of favour. 

Think, for example, of the BRICs acronym once used for those regions viewed as leading emerging markets and the view, within that, of Brazil and Russia as promising areas.

Both feel quite niche now but to touch on the first, Latin America funds have done well at times, as with the BlackRock Latin American Ord (LSE:BRLA) trust. But the data here illustrates how volatile such specialist funds can be. 

That trust might have done well over five years but, taking a more short-term view, it’s down by roughly 16% over just six months.

• Bill Ackman’s buys: six stocks enter the Pershing Square portfolio
• Why turbulence in Japan is important for all portfolios

The other sector included in the table will be mainstream to some investors but helps to illustrate a recent comeback. 

The likes of banks were in the doldrums for quite some time but have fared better lately, boosting funds with a financials remit. The one fund in this sector, Polar Capital Global Financials Ord (LSE:PCFT), has returned around 70% over five years. Roughly half the fund is in banks, with a little under a third in financial services companies.

These sectors, again, will not be for everyone. But this is a reminder that, in a market dominated by fevered sentiment around the artificial intelligence (AI) theme, other areas are also enjoying moments of decent performance.