Racy specialist funds: more room to run?

Investors have plenty of reason to be happy with 2025. There was ultimately no artificial intelligence (AI) bust, Donald Trump’s tariffs failed to sink the world economy and equity markets powered higher. Investors using tracker funds, be they global or regional, tended to make lots of money, while many active funds also made good gains.

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Once again, a less glamorous approach to investing – buying a diversified equity fund, not overthinking things and holding your nerve in bouts of volatility – has paid off handsomely. But if the main markets did well last year, it’s specialist assets that generated the most eye-wateringly high returns.

Funds focused on these profitable specialisms are understandably drawing in new investors after such a strong run. But while the good times could well continue, it’s important to not let such niche (and potentially volatile) funds occupy too much of your portfolio.

Chasing performance?

As mentioned, some of the most stunning returns of recent times have come from funds with a very granular approach. Jupiter Gold & Silver I GBP Acc and WS Ruffer Gold C Acc each returned just shy of 170% in 2025, while Seraphim Space Investment Trust Ord (LSE:SSIT) returned around 120%.

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Other specialist funds made enormous gains: Gresham House Energy Storage Ord (LSE:GRID) shares returned around 72%, UK small-cap play Marwyn Value Investors Ord (LSE:MVI), a name with a huge allocation to telecoms business Zegona Communications (LSE:ZEG), was not far behind it, while funds focused on South Korea, Latin America, biotech and defence also had a stellar year.

There is evidence, at the same time, that investors are piling into specialist names in the hope of chasing such returns.

Portfolios focused on physical gold and silver, as well as silver mining equities, were among the most bought exchange-traded funds in December, while Seraphim was one of the most popular trusts. Other specialist names, from tech funds to Scottish Mortgage Ord (LSE:SMT), also feature in our bestseller lists.

The case for optimism

Let’s first look at why such funds might continue to prosper. For one, the tumultuous state of the world might aid some of these assets.

2026 has already has its share of geopolitical strife, from the US capture of Venezuelan leader Nicolas Maduro to Donald Trump’s insistence on taking control of Greenland, and such uncertainty tends to bolster the gold price. It has already broken a fresh high on the back of events in Venezuela.

On a grimmer note, such developments provide a fresh boost to defence stocks and those funds with exposure.

As the table shows, defence ETFs have had a strong showing in the first few days of January.

Much as we should never judge investments by a few days of performance, it’s hard to ignore the huge gains such funds have made in just a handful of trading days.

The HANetf Future of European Defence Scrn ETF Acc GBP (LSE:NAVY) is already up by more than 8% for 2026 as at 7 January, with the Global X Defence Tech ETF USD Acc GBP (LSE:ARMG) enjoying a similar performance. Notably Seraphim Space, whose holdings have picked up various defence contracts, has made 17.5% in just a few days.

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

As we’ve recently noted, Seraphim is riding high at a time when the space industry is growing and defence capabilities are proving lucrative. But investors might want to tread with care, both here, and with the likes of gold funds, for a few reasons.

First, it at least seems hard to replicate such huge returns again.

A gold fund sitting on a 170% return over 12 months has a lot of momentum, as does a name like SSIT that sits on two years of substantial gains.

Worryingly, this is now reflected in some lofty valuations: gold has continually pushed through fresh highs, and the situation looks more extreme for SSIT.

The discount on which the shares traded in recent years has totally disappeared, robbing investors of any margin of safety, and the shares actually traded on a premium of almost 18% on 6 January.

Seraphim shareholders who watched the shares swing from a large premium to a hefty discount back in 2022 will know how painful it can be when sentiment turns.

To give a different example of a specialist name that has commanded a big premium, private equity giant 3i Group Ord (LSE:III) spent much of 2025 trading on a premium that came to almost 70% at one point.

When it issued an update with a disappointing forecast for main holding Action, the share price tumbled. The premium nearly disappeared at one point, although it has since returned to around the 14% mark.

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To dwell on some of the risks, it’s notable that specialist funds can sometimes be aggressively concentrated.

3i Group is largely a play on Action as mentioned, while Seraphim has around 35% of its assets in top holding ICEYE alone. That leaves such funds much more exposed to the successes, and failures, of individual companies.

How to invest in specialist areas

These niches are often pretty scarcely represented in mainstream funds, and some specialist plays have a good track record.

To look at some examples, Polar Capital Global Ins F Acc has won a big fanbase thanks to its record of strong performance over the years, combined with a low correlation to the MSCI World index. It can still have bad years, as with 2025 when dollar weakness dented returns, but has rewarded its fans well over time.

In the infrastructure space Cordiant Digital Infrastructure Ord (LSE:CORD) seems to be on a steady footing, doing well from a secular growth theme. But plenty of specialist plays fail too, from Cordiant’s rival Digital 9 Infrastructure Ord (LSE:DGI9) to the now disappeared music royalties trust Hipgnosis Songs.

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As exciting as such funds can seem, it’s important to offset the risks by keeping a lid on position sizes. An individual specialist fund arguably doesn’t want to represent more than 5% of your portfolio.

It makes sense, either once every six or 12 months, or after an especially pronounced price move, to rebalance back to your original allocations. Painful as it seems, that can mean taking profits on some of your most exciting winners.

It also helps to keep an eye on valuations. As the premiums mentioned above show, funds in demand can come at a high price, leading to big falls if investors run into disappointment.

It can, finally, be worth checking whether more generalist funds capture some of these specialist exposures.

This does happen in some sectors: generalist commercial property trusts now often have decent exposure to fashionable subsectors such as logistics, while generalist renewable energy infrastructure do have some limited exposure to areas such as energy storage.