Specialty Fund

Specialty funds represent an exciting option in the ever-changing world of investment for diversifying and optimizing your portfolio. Investment tools like mutual funds or exchange-traded funds (ETFs) focus on sectors, industries, or themes. They allow you to concentrate on certain areas like technology, healthcare, or sustainable energy with the hope of achieving higher returns through sector-specific growth and market trend exploitation. This article will therefore be discussing specialty funds from a broader perspective. 

What is a specialty fund?

A specialty fund is a mutual fund or exchange-traded fund (ETF) that focuses on a specific sector, industry, or investment theme. Unlike conventional funds, which diversify across different sectors to reduce risk, specialty funds concentrate their investments in particular areas. This approach seeks to capitalise on the higher returns potentially offered by the performance of a narrow market. 

For example, it may exclusively invest in technology, healthcare, renewable energy, or emerging markets. Such focus can result in greater volatility due to increased exposure within the targeted sectors.

Understanding the Specialty Fund

Specialty funds aim to take advantage of unique market movements or profit from growth in specific industries and offer a more concentrated investment approach. These funds concentrate on sectors such as technology or healthcare and can also be themed around things like renewable energy or emerging markets. Specialty funds hope for high returns when that industry does well. 

However, specialty funds are also riskier than more diversified funds due to their narrow focus. These funds perform well when the target area or trend goes well, but this also means they are easily affected by market instability and industry-specific slumps. Those who invest in them should expect their value to change frequently and be ready with deep knowledge about either the sector or theme chosen for investment. Specialty funds direct their investments and thus serve those investors who want their portfolios to be consistent with strategic themes and take advantage of emerging opportunities among the many different investment choices available. Despite the dangers involved, if an individual is okay with taking high risks in exchange for a chance at greater rewards, then having some of these investments could really pay off as part of a wider portfolio strategy. 

Types of Specialty Funds

These are some general types of specialty funds, each with its own focus and investment strategy: 

• Sector Funds: These funds concentrate on a specific industry sector, e.g., technology, healthcare, or financial services.

• Commodity Funds: These funds invest in physical goods like gold, oil, or agricultural products.

• Geographic Funds: These funds aim to invest in one geographical area, such as the Asia-Pacific region, Europe, the UK, etc., or some countries considered emerging markets.

• Socially Responsible Funds: These are based on companies that meet ethical and environmental criteria along with profit. They may only invest in businesses that practice fair trade. Their typical themes include human rights awareness and the improvement of living standards for communities affected by industrialization.

• Hedge Funds employ techniques designed specifically to protect and increase an asset’s value regardless of market conditions. This involves strategies like borrowing against securities held long-term (leveraging), selling borrowed shares, then buying them back more cheaply later (short selling), and dealing with options contracts, among others. 

Risk Factors and Considerations for Specialty Funds

There are numerous risk factors and considerations to consider when investing in specialty funds: 

• Concentration Risk: A lack of diversification in specialty funds increases their volatility and risk level.

• Market Risk: The success of a particular sector within the market affects how well these funds perform.

• Liquidity Risk: Some focused specialty funds may have trouble buying or selling shares due to limited trading volumes for securities enterprises located in specific geographic regions, etc.

• Management Risk: The manager’s performance largely determines a specialty fund’s returns because customers’ respective actions can greatly affect its outcome.

• Regulatory Risk: These kinds of profits are mostly in a way that may be easily influenced by variations in guidelines, handled industries, or the government that may disturb the usual workings of the items and the gains coming from them.

• Currency and International Risks: Focusing specialty funds on worldwide markets or perhaps currencies expose them to changes in foreign trade rates or political, economic, or social relations between different nations. 

Example of a Specialty Fund

• Lion-OCBC Securities Singapore REIT ETF. 

It was designed to include only the real estate investment trusts (REITs) listed on SGX. Its purpose is to imitate the Morningstar® Singapore REIT Yield Focus IndexSM. The product helps investors gain access to Singapore’s property market by offering a wide range of high-yield Singapore REITs. 

• ARK Innovation ETF (ARKK) 

This ETF invests in companies that are leading the way in disruptive innovation in industries such as health, technology, and industry. The fund seeks long-term growth through capital appreciation by investing in stocks of firms poised to benefit from advances in technology. It is managed actively as it holds positions in businesses driving the genomic revolution, automation, and energy storage. 

Frequently Asked Questions