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Choose the right sector when investing.
Be warned that when choosing an investment it is up to you to keep the matter under review. When you invest in a fund in a sector you are instructing the manager that you want to be invested in that sector. It is his job to the best while retaining that exposure, but you cannot expect him to quit the sector itself, even if he thinks it will collapse. Also recognise that in some major sectors, ( UK, USA, Japan, Europe ), such collapses are viewed as part of life, and nothing to worry about in the long term.
Although by no means the last word on the subject most funds, however constructed, fall into one of the following sectors, ( note I am using the term in its general rather than technical sense):-
Funds that operate a middle of the road approach in their market, ( e.g. UK General, US General et al).
Most peoples core equity exposure will be via these funds, normally UK General or International General areas.
The funds in the Balanced sector normally have a slightly more conservative approach. Managed Funds, ( normally linked to insurance policies and pensions ) are only partly equity based and also include gilts, deposits and property exposure, the aim being a good spread over all areas.
Index Tracking funds are a special case. Here the managers simply mimic the index with the logic that " most funds don't out perform the index anyway" and by tracking the index up and down they minimise costs.
With Profit Funds, ( always run by Life Insurers or Friendly Societies). Overall they have the same sort of risk reward profile as Managed Funds. What matters is the way that they work.
These funds invest in the local markets smaller companies. The logic is that smaller companies have more room for growth. ABC Widgets could triple in size next year with one good product, but ICI won't.
You will see evidence in the markets that these funds do better than those investing in larger companies. However the risk is higher , and in an economic downturn small companies find it harder to cope than large ones. There is also less market information about these smaller companies and you do need to rely on a manager with good stock selection. ( Though the bad news is that statistical analysis of the performance of fund managers over time shows that it is not possible to actually identify the good stock picker that you need, and no broker will ever admit to being a bad one. Ce la vie.)
Normally these are funds that invest in companies with a good history of dividend payments, but they may also try and enhance their income by using high yield companies, convertibles, fixed interest investments or the income shares of split capital investment trusts.
You should look for an investment portfolio in which you recognise all the companies as well known names, often including the privatised utilities. If this is not the case, ask questions as the fund may be more complex than simply using good yield shares. This may be to your advantage of course, but it is up to you to ensure that you understand your purchase.
Also find out if the annual management fee is taken from income rather than capital. ( Taking from capital boosts income, but using capital in this way carries a risk if markets fall ).
E.g. Japan, Mexico, Emerging Markets funds are simply funds invested in a particular area. You should be aware that the funds within any sector may be very different and not simply go the one that has done well. One managers fund may have been investing in Japanese smaller technology companies while another was in the big companies. The two should not really be compared, but are.
Before investing you should ensure that you understand the approach of the specific fund which you are looking at.
For those tempted into the more high profile areas highlighted in the press and marketing bumph be careful. Satisfy yourself that the fundamentals of a real long term growth phase are in place. Too often if a market is small in terms of capital the impact of foreign investment can drive it sky high, and then it collapses when reality bites and the foreign investors leave, leaving those who got in late licking their wounds. ( As happened to Mexico early in 1995) The soundest advice I ever heard for these areas was " buy into a wide range of countries, before the hype, during the revolution, before the famine, and wait, and wait, and when everyone else arrives, get out".
I was discussing investment in China a while ago and I said to the client that they would either lose the money, and be able to talk about it at dinner parties under the heading "big mistakes", or , if it went well, buy a swimming pool in 10 years time, but that neither I nor anybody else could really say which was the more likely. This uncertainty applies to all areas of investment, but esp. and smaller, newer, or specialised areas.
Normally self explanatory in the title, but most are in the Property, Financial, Money Markets, Commodities, ( mainly mining companies ), and Energy, ( also mainly mining and oil companies ).
Funds that only invest in the good and pure. Goodness is in the eye of the beholder and different managers have different approaches. Choose one that suits you. The only general rule is that they tend to be skewed towards smaller companies , not by design, but simply because the biggest companies tend to have so many ventures that it is very hard for them to meet the criteria.