22 Mar Sector fund investing: what’s hot?

Q. Which sectors do you think will do well over the next few years? I have lots of broad mutual funds but I wanted to invest in specialty ones, too.
— Broadening horizons

A. Sector funds can have huge performance, but because they’re so concentrated, they can also have huge losses.

Introducing sector funds into an asset allocation strategy will add industry and sector risk to a portfolio, and that’s the kind of risk that broadly-invested mutual funds are trying to eliminate, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.

Gobo said the clearest example of how sectors can behave differently than a broad index is the biotechnology sector, which through March 18, 2016 is down a whopping 29.22 percent, compared to the S&P 500 which is up 0.80 percent.

Another risk to be aware of is the possibility of portfolio overlap, where investing in a sector fund may cause your asset allocation to be too heavily weighted in one area, Gobo said. That’s because your other investments — both actively-managed funds and passive indices — may already have significant holdings in that sector.

For example, if you held an internet sector fund while investing in the S&P 500 during the late 1990s, you would have had a portfolio with an overweight of technology, media and telecommunications stocks, he said.

“If an investor were to adopt a core-explore approach and carefully monitor the allocated portion to the sector funds, they may want to consider global trends that are expected to continue over a three to five year time horizon,” Gobo said.

He recommends you be sure to measure performance relative to the time horizon rather than react to shorter-term movement — unless your initial thesis is proven wrong.

So what may be hot over the next few years?

Gobo said aging global demographics are expected to continue to increase overall expenditures in healthcare.

“Appropriate ways to implement for this theme include active sector funds in healthcare such as Fidelity Healthcare and REITs with a focus on the healthcare industry,” he said.

There’s also an expectation of the continued digitization of the world as technology disrupts the way of conducting business.

“Examples vary from ride-sharing technology companies that are changing how people use taxis to on-demand video services that are changing how media content is consumed,” he said. “Active science and technology sector funds are a great way to capture many of the sub-themes that underlie this major theme.”

He said MFS Technology and T. Rowe Price Global Technology are two funds with which you can begin your research in this area.

There’s also an expectation of growth in global consumers as increases in industry investment and global trade allow more people outside of the United States to join the middle class, Gobo said.

“As discretionary income increases, these families are increasing demand of goods and services that we in the USA may take for granted,” he said. “A good place to start exploring this theme is with the iShares Global Consumer Discretionary ETF.”

Always consider performance, risk characteristics and expenses before investing.

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This story was first posted in March 2016.