How to invest in the hottest industry sector and one with value

A key part of 80-20 Investor, aside from the algorithm and the fund shortlists, are the research articles. The aim is to give you access to the sort of research professional companies have. Or to put it another way, to give you access to your own research department - namely me.

Two 80-20 Investor members recently asked the following questions via Chatterbox:

The first was regarding the hottest sectors to invest in which I've slightly paraphrased for brevity.

Without going overboard any insights you may have into positive sectors would be useful. I’m thinking, for example, of so called hot market sectors. At the moment things like AI, internet security, and VR/AR are being seen as the next big thing along with solar energy. I’m a mathematical animal by nature, but am open to any avenue that would improve my returns.

The second question related to an individual sector, namely housebuilders:

Hi Damien, as you may remember part of my portfolio is interested in following my hunches and another part is linked to an income strategy. I’m currently attracted to the housebuilders sector which currently would find a home in both of the above segments of my portfolio. But…… I’m finding it difficult to find a fund that allocates heavily to housebuilding and I wondered if you could interrogate your statistics to point me in the direction of a fund or etf that does allocate to the housebuilding sector?

So this is the perfect opportunity to carry out investment research to answer both questions.

What do we mean by 'sector'?

The first thing to clear up is the definition of a sector. Up until this point most 80-20 Investor members will be used to the word 'sector' as used in our Best Funds by Sector shortlists. As you are aware there are thousands of funds available for investors to invest in. In order to give some kind of structure and facilitate comparisons the Investment Association groups them into around 30 categories (known as sectors), based upon what the funds invest in and their own mandates. These are the sector names used industry-wide and in our Best Funds by Sector section.

One example of a sector might be UK All Companies, which represents the funds that invest in UK equities primarily for growth. Now UK equities is a broad catch-all term and within that there are many types of companies. There are retail companies such as Tesco or construction companies such as Balfour Beatty. These companies operate in their own markets, namely retail and construction and their only common thread is the fact that they are listed in the UK. However their market or industry is referred to as a sector in the investment world. Confusing I know, but welcome to the world of finance. So you can have funds within the same Investment Association 'sector' (i.e. UK All Companies) which invest in companies from different industry sectors (such as retail or housebuilding). Having explained that I hope that helps the above questions make a bit more sense.

The hottest industry sectors right now?

If a DIY Investor wants to gain exposure to a 'hot' industry sector, one that is performing well, then it is difficult for them to do so. That's because they first need to work out which industry sectors (of which there are 38 in the UK) are performing well over the short and mid term but also which funds will give them a large enough exposure to them. Don't forget investment funds tend to diversify their portfolios and shy away from taking large bets on any particular stock or industry. That's largely down to the manager's lack of conviction and fear of underperforming their peers. So most managers will spread themselves thinly across most industry areas.

To work out the hottest industries right now I focused on the UK. If we consider the hundreds of company shares listed in the UK (and not just those in the FTSE 100) then they can be categorised into the 38 broad groups listed below:

• Aerospace & Defense, Automobiles & Parts, Banks, Beverages, Chemicals, Construction & Materials, Electricity, Electronic & Electrical Equipment, Equity Investment Instruments, Financial Services, Fixed Line Telecommunications, Food & Drug Retailers, Food Producers, Forestry & Paper, Gas/Water & Multiutilities, General Industrials, General Retailers, Health Care Equipment & Services, Household Goods & Home Construction, Industrial Engineering, Industrial Metals, Industrial Transportation, Life Insurance, Media, Mining, Mobile Telecommunications, Nonlife Insurance, Oil & Gas Producers, Oil Equipment; Services & Distribution, Personal Goods, Pharmaceuticals & Biotechnology, Real Estate Investment & Services, Real Estate Investment Trusts, Software & Computer Services, Support Services, Technology Hardware & Equipment, Tobacco and finally Travel & Leisure.

To work out the hottest sectors from a purely performance angle I focused on their 30 day and year to date returns to whittle the 38 sectors down to a shortlist of just 3 of the hottest sectors. I was looking for not only the absolute return but also the consistency of return. Interestingly the 'hottest' sector based on this screening is technology, just as the member who asked the question had pondered.

Sector	30 days %	YTD %	1 Year %
Technology Hardware & Equipment	4.31	64.5	75.43
Industrial Engineering	1.38	34.45	21.58
Software & Computer Services	1.74	23.78	38.05

The funds with the greatest exposure to the hottest industry

The even tricker part of the research was to then analyse all of the holdings of the thousands of funds out there to work out which funds gave the greatest exposure to the technology industry. This took over a day to complete.

The trouble is that if we were to look globally, enormous companies such as Apple will fall under the technology umbrella. Similarly if we just look at the Investment Association's technology sector we will be buying the likes of Apple again, which is not what we are after. So you have to be a bit smarter than that.

If instead you focus on the UK there are some very exciting companies in niches such as virtual reality, cloud computing etc. Yet these exciting new technology companies are typically smaller companies and therefore not usually invested in by the average fund manager. So it follows that a fertile hunting ground for funds investing in the hot new tech sectors are UK funds investing in smaller companies. The table below lists three funds I calculated to have the greatest exposure to new technology companies. Two of the funds will be familiar to 80-20 Investor members already. Liontrust UK Smaller Companies in particular was a regular in the Best of the Best Selection until very recently. While it has since dropped out of the Best of the Best shortlist, it remains one of the best funds within its sector as identified by our algorithm (see the UK Smaller Companies table within the Best Funds by Sector area). By way of example the fund invests in firms such as Reinshaw and Redcentric. The former is involved in a wide array of niches including laser technology and 3D printing. Redcentric on the other hand specialises in internet security and cloud services.

The table contains the same information as our standard 80-20 Investor shortlists but with the addition of the funds's exposure to technology as a percentage of assets.

Name	ISIN Code	1 month return	3 months return	6 months return	Max weekly fall in last 6 months	Ongoing charge	% Tech exposure
Liontrust - UK Smaller Companies	GB0007420788	3.29	9.45	13.53	-6.56	1.63	36.42%
M&G - Smaller Companies	GB00B6Z83898	3.28	8.18	3.22	-11.82	1.16	22.70%
Marlborough - UK Micro Cap Growth	GB00B02TPH60	3.29	11.57	10.93	-7.96	1.55	19.56%

 

The value trade: How to gain exposure to housbuilders

Companies that build houses (houesbuilders) fall into the Household Goods & Home Construction industry sector. Now the sector is not one of the hottest right now but, as the 80-20 Investor member who asked the question suggests, there are reasons why you might be optimistic about this sector in the future. I explain why this is in my recent article 'The sectors with the best value opportunities & the funds to buy'. That's the beauty of investing your own money, you can back your own hunches if you want to. Yet the pursuit of value within the housebuilder sector is tricky because my analyses shows that no fund has more than 11% exposure to the sector, as demonstrated in the table below. Coincidentally the three funds with the greatest exposure to housebuilders are all from the UK All Companies sector.

 

Name	ISIN Code	1 month return	3 months return	6 months return	Max weekly fall in last 6 months	Ongoing charge	% Houseebuilder
Schroder - UK Mid 250	GB00B76V7S22	0.67	5.54	2.97	-10.65	0.91	11.11%
Artemis - Capital	GB00B2PLJM64	-1.78	6.47	4.07	-8.08	0.89	7.51%
Man GLG - Undervalued Assets	GB00BFH3NC99	-0.17	8.15	6.06	-7	0.98	5.44%

 

Interestingly having researched possible ETFs you are also only likely gain exposure to housebuilders, without over-exposing yourself to one or two firms, via an ETF that tracks a broader equity index, such as iShares MSCI United Kingdom Small Cap ETF. This has exposure to most UK housebuilders but with an allocation to each of less than 2%. Which would take the overall property exposure to probably below that of the Schroder fund mentioned above.

How this fits in with the 80-20 Investor algorithm

The research nicely demonstrates the power and simplicity of using the 80-20 Investor algorithm, which obviously wasn't the intention of this article. The well informed may well have become aware that technology stocks were the hottest sector to gain exposure to this year. However, this trend fed through to the 80-20 Investor algorithm which is why Liontrust UK Smaller Companies and Marlborough UK Micro Cap Growth have featured in the 80-20 Investor shortlists. If a industry sector gains momentum and a fund manager makes a strong tactical bet, backing their convictions, their fund too will gather momentum and be picked up by the 80-20 Investor algorithm. Of course, the algorithm doesn't just look at performance it takes other factors into account such as how any returns were achieved as well as the level of investment risk. If a fund manager manages to take advantage of a solid momentum trend they will come to the fore for 80-20 Investors. Then when the trend dissipates they will be screened out by the algorithm.

What that means is that 80-20 investors can ride the hot sector trends without having to articulate or understand what they are.