Rating company slams ‘redundant funds’

Morningstar has issued a warning on sector-specific and region-specific funds.

Christine Benz, the head of personal finance at Morningstar, says the funds are likely to be redundant in most portfolios and poor investment timing by clients often damages returns.

Regional funds include Fidelity’s recently launched China Special Situations investment trust managed by Anthony Bolton, while sector funds include Jupiter’s £1.1 billion Global Financials fund managed by Philip Gibbs.

Benz says: “If investors have got a well diversified portfolio, they probably already have exposure to that sector or region, so they are redundant.”

She says investors’ timing with such funds tends to be “terrible” so they often fail to reap the high levels of total returns often published by providers. (article continues below)

Other sector-specific funds include the £2.5 billion BlackRock Gold and General fund managed by Evy Hambro.

Benz says many thematic funds such as green and climate-change funds are set up just to give the providers “a quick buck” and not to benefit investors.

She says: “By the time the company gets around to setting up a fund, the theme is often well reflected in security prices, so I think these funds can be risky and you do not always know what to expect in them. They are often not very focused.”

James Cook, a product manager at Fidelity International, says: “More than 60% of GDP growth in 2009 came from emerging markets, yet allocations to the growth regions of the world remain at a minimum level.

“What we are seeing is investors increasing these allocations via global funds or regional-specific funds.”