Specialty funds are the next shiny object to hit the markets, with their focus on potentially high-growth areas as resources and commodities. New specialty funds come to the market in what are often unproven segments of the market that have caught the public’s eye usually through large jumps in share prices in a short time-frame.
Let’s look at examples of specialty funds in recent history.
In 1998 and 1999 there was a flurry of specialty investment products to take advantage of the “ Y2K Tech bubble” which resulted from a concern that long-standing computer programs weren’t programmed to adapt to the change in century to the year 2000.
· The next specialty investment craze was driven by the cost of oil. New funds were created to fund the development of Electronic vehicles.
· In 2015 we first heard of “Bitcoin” – the first significant cryptocurrency. The value of Bitcoin and other cryptocurrencies have fluctuated enormously, as they are not based on any hard assets. Even now, there are still more cryptocurrencies being developed.
· In 2017, the new “flavor of the year” was Cannabis production as Canada was getting ready to legalize marijuana use.
Were any of these investment crazes really the next best thing?
It’s true that those who invested early in the right companies did well on their investments. But most investors, who came along once the hype hit the newspapers, have not made great returns. This poor performance is amplified by considering the risks taken on by investing in smaller companies.
If you want to invest in these specialty funds, I would suggest investing only a small portion of your assets. I call these amounts “reserve investment money” – money you can afford to lose. A small investment will put your foot in the door. Once the companies are established for at least 5 years, then look to make quality investments. There are fraudsters operating in every sector, so be aware. Here is a recent fraud case in Ontario’s marijuana industry.
The risks in specialty funds
1. Volatility – often specialty funds invest in smaller startup businesses that likely lack the stability of more established companies. This may translate to greater than normal price fluctuations.
2. Increased risk – because these funds invest in a very narrow market segment, they are vulnerable to economic changes in that sector. In many cases, the companies involved are awaiting regulatory decisions.
3. Long-term focus – Volatility plays a large part in specialty funds. They should only be considered as long-term investments.
Positioning specialty funds in your investment portfolio – As mentioned above, until these industries are historically sound, it is wise not to make them a significant portion of your equity portfolio.
As always, diversification is the key to growth. Get advice from someone who has your best interests in mind.
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