- Biotechnology to have another good year
- Drip-feed investment in a well-diversified tech fund
- Financials and infrastructure to see strong growth too
In a year of widespread sell-offs in mainstream markets, a number of specialist sectors including biotechnology and private equity have protected and grown investors' capital.
As 2016 has the potential to be an equally volatile year, specialist sectors may again prove safe harbours, and indeed strong growth areas, for the adventurous investor.
The biotechnology sector was one of the strongest performers of 2015. In the calendar year to 1 December, the Nasdaq OMX Biotechnology index returned 14.3 per cent compared to just 4.5 per cent from the MSCI World index, despite a period of volatility in the third quarter of the year.
This continues a near five-year stretch of outstanding returns for biotechnology - a rally that many commentators expect to continue for some time.
'The need for healthcare across the world won't change. The way the industry is developing new drugs, new therapies, new ways of targeting diseases, that is an exciting prospect over the next five to 10 years, and I think we'll see a lot of growth in the industry during that time,' says Andy Parsons, head of research for The Share Centre.
Parsons does concede that over the short term there may be some volatility in the share prices of biotechnology companies as valuations return to earth; however, he expects the sector to continue to do well next year as the global growth picture remains unclear elsewhere.
Like biotechnology, the technology sector has historically been a volatile investment area, particularly around the dotcom bubble in the early 2000s. Nonetheless, the world is becoming increasingly technologically advanced and investors may do well to get some exposure.
'We are going through a technological revolution. Trends include driverless cars, big data, the internet of things and, of course, the changing employment landscape as automation continues apace. The trajectory is clear,' says Parsons.
However, as the dotcom bubble demonstrated, picking tomorrow's tech winners can be tricky. As such, Parsons says that drip-feeding money into a well-diversified technology fund is usually the best way in, as this helps to smooth out what could potentially be steep short-term volatility.
Another often volatile specialist investment area is financial stocks, which have taken a reputational battering since the financial crisis of 2008.
This has been largely thanks to the behaviour and subsequent near collapse of the big banks, which dominate the sector and the wider global economy.
However, as Gavin Haynes, managing director of wealth management firm Whitechurch Securities, observes, the banking landscape has changed markedly since 2008 as regulation has forced banks to increase their capital bases and improve their practices.
'Performance has been quite good over the past couple of years and we think there could be further recovery to come,' says Haynes.
INFRASTRUCTURE AND PRIVATE EQUITY
A typically uncorrelated, high income-bearing sector, infrastructure has become increasingly popular with investors.
In the investment trust space (where the majority of infrastructure funds are found), the average share price premium to net asset value currently stands at around 10 per cent, while the most popular open-ended funds attract huge inflows.
Despite its popularity, both Parsons and Haynes like the sector and believe that it will do well next year. Because of the large premiums in the trust space, however, they recommend investors access infrastructure through open-ended funds.
Haynes is also a fan of private equity, a sector focused on early-stage, unquoted companies with plenty of growth potential that, like biotechnology, held up particularly well in 2015.
The asset class can be accessed through private equity investment trusts, which either invest directly in unlisted companies or hold other private equity funds, helping to increase diversification.
HOW TO BUY THE SECTOR
Tracker funds tend not to be popular for exposure to specialist sectors because they track the whole market, whereas investors are generally seeking out certain characteristics or particular stocks.
Specialist ETFs do exist, but investors thinking of using them should be absolutely clear that they fully understand what they are investing in.
Options include the db X-Trackers MSCI World Financials and Amundi ETF MSCI World Financials indices, iShares Trust NASDAQ Biotechnology, iShares Dow Jones Technology and db X-trackers S&P Global Infrastructure. They are available from UK stockbrokers.