Special considerations: want to invest in Russian oil stocks or traded endowment policies? Pauline McCallion looks at specialist investment trusts to see what's available and how they work

What Investment, April, 2007 by Pauline McCallion

A specialist investment trust is one that focuses on a specific area, be that a geographic region or country, or a certain industry, such as mining, financials or biotechnology. The AIC has separated these specialist investment trusts into 12 main sectors (not including the country specialists--see "Specialist Sectors"), to allow for easy identification. These sectors hold a total of 33 investment companies with combined assets of 6 billion [pounds sterling], compared with total assets of 86 billion [pounds sterling] for the investment trust sector as a whole.

THE AIC: DEFINING THE SECTORS

The list of 12 specialist investment trust
sectors is drawn up and monitored by the
statistics committee of the Association of
Investment Companies (AIC).

  The AIC's Jemma Jackson explains, 'If a
company is launched that does not fit into
an existing category, we will create a new
one to reflect what it does in order to help
the market differentiate between the trusts
and sectors.'

  Jackson highlights the infrastructure
sector as a recent example. 'Given the
continuing evolution of the specialist part
of the market, it is hard to predict what
new specialist sectors are likely to appear.
But many launches we have seen recently
have been infrastructure funds, and hence
a 'Sector Specialist: Infrastructure' sector
has been created. The sector was introduced
when HSBC Infrastructure launched.'

  In addition, the AIC can make changes
to sectors, as it did when Sector Specialist:
Alternative Energy became Sector Specialist:
Environmental due to an expansion of the
remit of some of the trusts involved.

  In the same way, sectors can be
discontinued. Sector Specialist: Tea
Plantations has only one company (Tea
Plantations IT), which is about to widen its
remit to a more mainstream objective.
Therefore this sector is soon to disappear,
according to Jackson, cutting the number
of specialist investment trust sectors to 11.

SPECIALIST SECTORS

The list of specialist investment trust
sectors, as recognised by the Association
of Investment Companies (AIC), is divided
into Sector Specialists and Country Specialists.

Sector Specialists:

Biotechnology/Life Sciences
Commodities and Natural Resources
Endowment Policies
Environmental
Financials
Infrastructure
IT Companies
Liquidity Funds
Small Media, Communications &
Securitised Debt
Technology, Media & Telecommunications
Zero Dividend

Country Specialists:

Investment companies whose policy is to
invest in one or two countries. They are
classified into Europe, Asia Pacific and
Others. There are ten companies in these
three sectors, with total assets of more
than 1.4 billion [pounds sterling].

  In order to be included in the AIC's
list of specialist trusts, a company must be
an AIC member and so adhere to the
following criteria:

* Its principal business must be investing
  in a diversified portfolio of assets

* Its shares must be traded on an
  investment exchange

* It must be closed-ended.

As with any investment, it is important to maintain a balanced portfolio; but there is no reason why a specialist trust can't form a part of that, perhaps cushioned by a generalist trust or two. James Budden, managing director of Witan Investment Services, thinks: 'A good idea would be to have a few generalists in a core holding, then there are some fantastic specialists out there to put around the core portfolio.'

Specialising in one, often quite specific, area may sound risky, but there are ways of diversifying within this approach. Jemma Jackson of the AIC elaborates: 'Rather than spreading risk across a variety of sectors, a specialist investment trust will focus on one area; so naturally specialists can be higher risk than generalist trusts. They can, however, add diversity to a balanced portfolio. Plus, specialists themselves help spread risk by investing in many different companies within their chosen remit.'

Anzelm Cydzic, investment trust liaison and development manager at Baillie Gifford, also highlights this point, explaining: 'It all depends on the level that the investor comes in at in terms of knowledge, risk appetite and the amount of time they have to research. You can slice investment trusts all the way down from the very top--the generalists--to the bottom, the specialists, cutting across a broad spectrum.'

Special structure

What most commentators also point out is that the investment trust structure sits quite naturally within the needs of the specialist sector. Jason Butler, partner at Bloomsbury Financial Planning, says: 'With an investment trust there is a large number of shares, which equals benefits for the manager, especially in less liquid markets, as it means they can be fitly invested all the time and don't have to worry about inflows and outflows. With a unit trust, on the other hand, you have to keep a large percentage in cash. In addition, investment trusts won't be forced to sell their good stock in order to fund redemptions, as unit trusts sometimes have to.'

James Budden points out that specialist sectors tend to be more volatile and less diverse than generalist holdings, and therefore demand is more likely to ebb and flow. However, most of the time, investment trusts can ride this out, as investors know they are in it for the long haul. Thus, they can go into volatile markets that require a long-term view in order to derive value; or those markets that are more illiquid, such as property. He adds: 'With unit trusts, if the investment trend dries up, the company will essentially wind up. It is difficult to sustain a unit trust if things get tougher. You have good years and bad years, and you just have to stick with it.' This is something that is a lot easier for an investment trust to do.