OK, Couch Potatoes, This Fund's for You
Specialty funds focus narrowly, sometimes profitably
When it comes to mutual funds, there's a specialty fund for almost every taste.
Want to help animals? There's an animal rights fund. Want to invest in nursing homes? There's a fund dealing with the elderly. Russia enthusiasts can invest in this year's top-performing fund, the Lexington Troika-Dialog Russia Fund. Even astrologers will soon have their own fund, now pending approval by the US Securities and Exchange Commission.
Specialty mutual funds target a particular product, geographic region, or group of people. Investing in them can be educational, fun, and emotionally rewarding.
And as you can see by the Russia fund, such investing can also be financially rewarding.
But unless your investment is based on solid underlying economic fundamentals, such as the turnaround that some economists see in Russia, the returns on specialty funds can be far from special, experts say.
Moreover, specialty funds can be highly volatile and frequently fail to stay in the race.
Case in point: The Sports Fund opened with substantial media hype last summer.
Targeted at sports fans, the fund invested in companies linked to athletic pursuits. But investors remained wary: Assets reached only about $500,000. And total returns were not exactly slam-dunk spectacular. The fund consistently underperformed the Standard & Poor's 500 stock index.
It was sent to the locker room earlier this year.
"Many specialty funds are interesting to talk about, but if you are a serious investor, you really have to ask yourself why you are invested in one in the first place," says Cebra Graves, an analyst at Morningstar Inc. in Chicago. "Many of these funds deserve no serious attention."
"Often [specialty] funds represent a marketing gimmick," says Maria Crawford Scott, editor of financial publications at the American Association of Individual Investors in Chicago.
"You have to wonder what kind of financial resources" such funds and their management companies put into basic research and analysis, she adds.
Regardless, many specialty funds continue to hang out their shingles.
A few examples:
* The Cruelty Free Value Fund. It seeks to protect animals and the environment. It will not invest in companies that use animals for product testing. And it buys into companies that support animals, says Kurt Ross, a fund spokesman.
* The Gabelli Global Infrastructure Couch Potato Fund. It invests in international media and entertainment companies. It has $30 million in assets.
* The Munder Net Net Fund. It invests only in companies linked to the Internet.
* The Pauze Tombstone Fund, perhaps the most unusual specialty fund. It invests in companies such as funeral parlors. A fund spokesman notes that the fund is based in part on demographics: the aging of the US population.
Two types of specialty funds have performed well, Mr. Graves notes:
Socially responsible funds. These typically invest in companies based partly on their record on the environment, equal opportunity, human rights, and other social issues. Some of these funds have proved themselves over time, turning in respectable returns.
Country-linked funds. These can be very volatile. A few years ago, Latin America funds were in trouble, as the region grappled with low economic growth and high unemployment. Now, several rank high among the leaders.
The Lexington Russia fund is also volatile - and successful of late. With $50 million in assets, the fund has a focused portfolio of about 50 companies. Roughly three-fourths of the money goes to three sectors: oil and gas, telecommunications, and utilities.
If you consider investing in a specialty fund, experts stress the following advice:
1. Check for a solid economic case that warrants investing. There's nothing wrong with social objectives, but you probably want your investment to make a profit, too.
2. Be aware of your risk tolerance. The less diversified the fund, the more exposed it is to market shocks and big price swings.