Managed Funds Survey: Ethical or in recovery?

There are various ways in which fund managers can invest your money. By Tony Lyons

WHEN YOU entrust your money to a fund manager, you hope that he or she will make you oodles of money. If truth be known, you probably won't ask so will never find out what investment philosophy they follow. All investors really care about is whether the manager is successful.

There are, however, different investment philosophies and accompanying articles have shown those most used nowadays by UK fund management groups. Some funds, because of their very nature and aims, fall into distinct camps where philosophy is secondary importance. Let's now look at a few of these:

Special situation funds: "Managers of these funds are always on the look out for undervalued companies," says John Ross of Fidelity. "They tend to travel alone, away from the crowd, with a bias towards medium and smaller companies. They are looking, as the name implies, for something special such as new products or new management, something that will make the shares motor."

What they are looking for are companies that have promising prospects that no one else has spotted. This means they do almost all their own research as they don't particularly want to invest where many others have already gone. Having found the right companies, they back their hunches.

Recovery funds: These can include some types of special situation funds, as they are looking for companies that have fallen on hard times but because of changes, usually involving new management, there are good prospects that they could prosper again. Quite often, a restructuring could be involved, with disposals and acquisitions. So while their shares may be low, they could begin to rise and significantly outperform.

M&G Recovery, with pounds 1.3 billion of assets, is by far the largest fund of its type. "Recovery stocks have suffered during the last couple of years as concentration has been on the very large companies, spurred on by takeovers," says John Hatherly of M&G. "In the past, they have tended to do poorly when there is a recession or economic slowdown. But in these markets, being overweight in small and medium companies, underweight in sectors such as telecoms, financials and pharmaceuticals, has been a problem. While the FTSE 100 and All Share went up over 17 per cent and 13 per cent respectively last year, the index for smaller companies fell 8 per cent.

Sector specialist funds: While there are a handful of funds that follow new global trends in demographics and social factors, such as ageing populations and increased leisure time, there are many that tend to invest in very specific sectors such as healthcare or technology. They are usually labelled as higher risk investments.

Although they look at the world markets, very often they find that the overwhelming majority of their investment opportunities are in the USA. For example, it is estimated that around 80 per cent of the companies connected with the world of computers and the Internet are listed on Wall Street or Nasdaq, both US based.

Country specific funds: Funds investing in geographic areas such as Europe or the USA are generally seen as being medium risk. These are very large, diversified markets. They are open markets with controls similar to those at home.

Country specific funds, especially if they are based on emerging markets, are very high risk indeed. So many factors are out of the control of the fund manager that it does not matter what investment philosophy he uses.

As well as time and language problems, there may be rules on the way foreigners are allowed to invest, and there can also be currency controls. Indeed some of these emerging markets can be incredibly volatile, going from boom to bust in no time.

Ethical funds: Some investors object to having their money in companies that make their profits by unethical means. If so, there now over 20 ethical funds available that might suit you.

But the self-imposed restrictions on the fund mean that they have to look at their portfolio on a company-by-company basis. While the managers may have views on the economy, these are not the determining factor when it comes to their investments. Paramount is ensuring a company fits in with the fund's strategy and that it offers prospects of good returns.