Picking the right sector

Gone are the old days when a sector fund invested in either natural resources or precious metals. Now you can invest in funds that specialize in almost any area of the economy you may be interested in.

The question is, should you bother? And, if so, what should your strategy be?

Science and technology funds have been the rage recently and, given the incredible returns some of them have produced, it’s understandable why. But they’re only the tip of the iceberg when it comes to sector funds. So here’s a rundown of what’s out there now, and which funds are worth your attention.

Science & Technology

The situation. When the fund categories were overhauled a couple of years ago, they created a brand-new one for the burgeoning S&T sector. The problem is that so much has been stuffed into it that comparing performance numbers is often an apples and oranges situation. How can you rank a health care fund against one that specializes in information technology? Should a Nasdaq index fund really be compared to a global telecommunications fund? Yet that’s exactly what’s happening within this stew.

It gets worse. There are fundsn the Specialty/Miscellaneous category, such as Altamira e-Business, that really seem to belong in S&T. In the Specialty category, the one-year numbers look outstanding. But compared to other S&T funds, they’re just okay.

So if you want to invest in a genuine S&T fund, you have to do a lot of weeding.

The outlook.

Long term, there are good profits to be made from S&T funds. But the short-term volatility can be frightening, as we saw during the spring Nasdaq correction. A fund can lose 20% in a month, so if you’re going to invest here, you’d better be ready for that.

Best bets

. Global funds are the best choice. The U.S. is the leader but it isn’t the only show in town. AIM Global Technology is currently on our Recommended List and shows an incredible average annual return of 64.3% for the three years to June 30. Other excellent choices are Altamira Science and Technology, Talvest Global Science and Technology, and C.I. Global Technology.

Telecommunications

The situation. Some of these funds show up in the S&T category and some in the Speciality/Miscellaneous category. Their focus is tighter than the usual S&T fund in that they concentrate on one specific aspect of the business: telecommunications.

The outlook

. The telecommunications industry is burgeoning. When you look at the growth potential from wireless, data transmission, developing countries and more, the profit potential seems boundless. But there’s a caveat. Fierce competition is cutting deeply into the profits of traditional local and long distance voice communications. These companies are being forced to look far beyond their original core business for new profits, and that brings more risks.

Best bets.

C.I. Global Telecommunications has been on the MFU Recommended List since September 1999. One-year return to June 30 was 71.2%. Over three years, the average annual compound rate of return was 69.4%. You won’t find better.

Health Care

The situation. Health care funds that specialize in biotech stocks took a hit in the Nasdaq correction. They’re only rallying now.

The outlook.

Good over the long term. Volatile short term.

Best bets.

We recommended the Talvest Global Health Care Fund in May. We believe it stands head and shoulders above the others.

Financial Services

The situation. The mutual funds industry seems to think that people are panting to invest in funds that specialize in the financial sector. There are eight now available, most relatively new. These are better suited for more conservative investors, people who like banks, brokerages and mutual fund companies in their portfolios. However, that doesn’t mean they won’t experience volatility. It’s just not likely to be as intense as you’ll see in an S&T fund.

The outlook.

Financial services stocks have been hampered to some degree by the rising interest rate environment. As well, the federal government’s decision to kill the big mergers has cooled investor interest in the banking sector. The net result is that many of these stocks represent good value at current levels.

Best bets.

C.I. Global Financial Services stands out in this group, in part because it is one of the few with a long enough track record to give us a sense of confidence. The fund invests around the world and the portfolio is well-diversified internationally — it’s not just a U.S. fund with a couple of German banks tossed in for window-dressing. Three-year average annual compound rate of return to June 30 was 21.4%, which is very good considering the conditions.

Natural Resources and Precious Metals

The situation. As far as natural resource funds are concerned, if you’ve been heavily into energy, you’ve done well. If not, forget it. As for the precious metals funds, the less said, the better.

The outlook.

Energy-based funds should continue to perform well, at least for the rest of this year. There’s a lot of value in the other resource sectors, such as forestry and mining, but investors aren’t rushing to buy. Bullion prices continue to wallow and without a breakout there, precious metals funds will go nowhere.

Best bets.

Fidelity Focus Natural Resources. With about 80% of its assets invested in the likes of Chevron, Exxon, BP, Atlantic Richfield, and Royal Dutch (Shell) this fund has done well over its first three years, with relatively low volatility. The average annual return for the three years ending June 30 was 13.8%, at a time when the average of all natural resource funds was down 10.1%. With $20 a barrel oil apparently a thing of the past, and with global demand increasing, there should be more profits ahead.

Adapted from Mutual Funds Update, a monthly newsletter published by Gordon Pape Enterprises Ltd. and available in either electronic or paper formats. For subscription information, visit www.gordonpape.com