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What Are Specialty Funds? – The “Uncharacteristic” Mutual Fund

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Introduction

 

 

The most basic types of funds invest in a single asset class, such as stocks, bonds, or money markets.

While other fund types such as balance, asset allocation (funds that invest in a single asset class), and target date combine multiple asset classes in a single portfolio.

In addition to these, investors can invest in a wide range of specialty funds. Specialty funds target specific investment objectives, or narrowly focus on certain segments of the market.

In this lesson, we’ll answer the fundamental question of today’s lesson: What  Are Specialty Funds? – As we examine the unique benefits and risks they have to offer.

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

 

Specialty Funds

 

Specialty funds are a broad category of funds that typically don’t fit in the other fund type categories.

The difference is that specialty funds are generally not diversified. Instead of diversifying across different investments, specialty funds tend to focus on certain segments of the market, and therefore, concentrate holdings in one investment type.

For example, some specialty funds focus on investing in stocks from a specific country, like Brazil, China, Germany, or Singapore.

Other specialty funds target stocks in a specific sector of the economy, such as financial, technology, energy, or health care, among others.

And then there’s real estate specialty funds. These funds might invest in stocks of residential or commercial real estate companies.

As shown in these examples, specialty funds focus on specific investments, and are less diversified than other funds.

However, this narrow focus can potentially help an investor meet a specific goal. For example, suppose an investor travels to Brazil for a vacation.

 

 

During the taxi ride from the airport to the hotel, they are surprised at the tremendous amount of construction going on. At the hotel, they can’t help but notice its booked with professional men and women negotiating business deals.

Later that night, they see the stores are packed with consumers purchasing good and services.

Based on their observations, they think Brazil’s economy is strong, and likely to continue growing, which should push the value of Brazilian stocks higher.

To capitalize on their observations, they decide to invest in a specialty fund that solely focuses on stocks in Brazil.

If they’re right, this fund could potentially deliver returns that are higher than they might earn in other investments. But with this narrow focus and potential for higher returns – comes greater risk.

Risks Of Specialty Funds

 

One such risk is that they could be wrong about the strength of Brazil’s economy.

Because the stock fund focuses on one country, it has less diversification, and could suffer large losses if the economy slows down.

 

 

Another risk is the expense ratios of specialty funds tend to be higher than other fund types. That’s because specialty funds can require more in-depth analysis by fund managers, or certain expertise that comes at a premium.

For example, the manager of our investors’ Brazilian fund could regularly send a team of analysts to Brazil to perform research. This expense could be included in the specialty fund’s expense ratio, which then raises the overall fees of the fund.

Another risk is that specialty funds are complex. Our Brazilian stock fund, for example, is complex for two reasons: Political risk and Currency risk.

Political risk is the risk a country’s politics could change, adversely impacting the value of the country stock market.

Currency risk is the risk a country’s currency value could change, adversely impacting the value of the country’s stocks.

 

 

But keep in mind, these risks are unique to our country-specific specialty fund example. Other specialty funds, such as sector or real estate funds, can also present a number of complexities and risks.

To identify and potentially guard against these risks, carefully read a specialty fund’s prospectus. A prospectus outlines the unique risks a specialty fund might face.

So if you identify a specific investment goal, and find a specialty fund that might help you meet that goal, take your time to read the fund’s prospectus, and understand the risks associated with the fund before making any investment decisions.

 

Quick Recap

In Review….

Specialty Funds

 

  • Specialty funds are a broad category of funds that typically don’t fit in the other fund type categories
  • The difference is that specialty funds are generally not diversified. Instead of diversifying across different investments, specialty funds tend to focus on certain segments of the market, and therefore, concentrate holdings in one investment type
  • For example, some specialty funds focus on investing in stocks from a specific country, like Brazil, China, Germany, or Singapore
  • Other specialty funds target stocks in a specific sector of the economy, such as financial, technology, energy, or health care, among others
  • And then there’s real estate specialty funds. These funds might invest in stocks of residential or commercial real estate companies
  • As shown in these examples, specialty funds focus on specific investments, and are less diversified than other funds
  • However, this narrow focus can potentially help an investor meet a specific goal

 

Risks Of Specialty Funds

 

  1. Dependent on the strength of a country or market sector – as this could jeopardize your investment
  2. High Expense Ratios – specialty funds can require more in-depth analysis by fund managers, or certain expertise that comes at a premium
  3. Political Risk – The risk a country’s politics could change, adversely impacting the value of the country stock market
  4. Currency Risk – The risk a country’s currency value could change, adversely impacting the value of the country’s stocks

 

  • But keep in mind, these risks are unique to our country-specific specialty fund example. Other specialty funds, such as sector or real estate funds, can also present a number of complexities and risks
  • To identify and potentially guard against these risks, carefully read a specialty fund’s prospectus. A prospectus outlines the unique risks a specialty fund might face
  • So if you identify a specific investment goal, and find a specialty fund that might help you meet that goal, take your time to read the fund’s prospectus, and understand the risks associated with the fund before making any investment decisions

 

 

And these are specialty funds. Unlike their mutual fund counterparts, they are not diversified and tend to concentrate more so on a particular segment of the market – such as other countries, sectors, ect.

They are often a bit more abstract in the sense that they are affected by macro-principles, such as the overall well-being of the economy, the political atmosphere, as well as the fluctuating value of currencies. Analysis of these types of funds requires more analysis and research, which in turn, results in a higher expense ratio.

Before making any investment, make sure to research the fund’s prospectus and conduct fundamental analysis first – as this will help gauge the strength of the underlying specialty fund.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

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