Is there a place for thematic funds in a portfolio?

Thematic funds were very much the rage in the late 1990s until most of them came a cropper for varying reasons. Most were closed down and of those that survived, several took a long time to recover

Funds that come to mind include Investec Micro Cap, Velocity Emerging Growth, Brait Phambili, Sanlam Empowerment Equity, Old Mutual and Standard Bank Gold, RMB Consumer, NIB Intellectual Capital, Sage Internet, Brait Superhighway and Old Mutual Global Technology.

Going back in my 1999 files, I came across headlines such as 'Looking for Tomorrow's Microsoft', 'Growth and Risk Go Together', 'Don't Lose Out on the Spectacular Growth in Technology Shares', and 'Our Global Technology Fund Attracts R250 Million A Month'.

The rest, of course, is history, save to say that most unit trust companies changed their tack very quickly, advising investors to invest in or stick with well balanced core funds. Not that it was always the right answer either - several prudential funds performed atrociously for several years. It's not just the gains that need to be compounded over time, but the losses as well.

Major bolt-ons' to this so-called more responsible, more secure approach were the emergence of asset allocation funds and absolute return funds, some laced with derivatives. Investec Asset Management deputy MD, Thabo Khojane, told me a few days ago that he believes that this trend, driven by Investec Asset Management and Coronation, has been one of the most formidable in the industry in a long time.

"There has come a far better understanding and appreciation of skill, with institutional investors being increasingly comfortable to pay fees that are dependent on the demonstration of that skill. This has manifested itself in the proliferation of absolute return products, the emergence of boutique and hedge fund managers, and the fundamental transformation of how investors procure portfolio management and pay for it".

The question that begs, is that with the wholesale failure of thematic funds in SA, is there anything favourable that can still be said about them? I believe that the answer is the affirmative. They should never constitute your core portfolio, but there is always a time and place for them in any well-balanced portfolio. The secret is to select winners, funds that are poised to do extremely well over a well-chosen period; and to know when to take profits.

An interesting fund that may well fall into this category is Sasfin's new local emerging market fund, the 'Twenty Ten Fund', managed by prominent investment expert and radio personality, David Shapiro.

The only one of its kind, it'll focus exclusively on the private sector's participation in the pipeline of infrastructure and social grant expenditure and the multiplier effects that'll evolve in the lead up to 2010 and beyond. The fund will position itself to take advantage of the long cycle of proposed spend on capital formation, the elimination of disease and social grants.

Shapiro tells me that the idea of his fund emanated from President Thabo Mbeki's parliamentary address earlier this year when he announced that R165 billion was to be spent on infrastructure and social grants before 2010. This was enhanced by reports that Government aims to lift sustainable real economic growth to 6% a year and reduce poverty by half.

Government has already approved projects totalling R133 billion. This includes R93 billion to be spent by Eskom and R40 billion by Transnet. Other planned expenditure covers public works and roads (R25 billion), Telkom (R4 billion) and the Airports Company of SA (R3.5 billion).

Turning to the global scene, the most overriding theme at present is China, and if you wish to get direct exposure to that, you might consider the Templeton China Fund that was recently approved by the Financial Services Board. The only other way South Africans can get exposure to China is either through Asia Pacific funds or global funds. The only rand-denominated Asia Pacific fund at present is the Sanlam Asia Pacific Fund of Funds.

I personally wouldn't bet on a pure China fund because I haven't been converted yet to believing that it's a financial paradise. Besides, when in Paris two months ago, a leading analyst told me that of the more than 1 000 mainland stocks listed in Shanghai, only a limited number are viable investments.

But in fairness to the Templeton China Fund, it was established in 1994, has US$546 million under management, and it has generated a 64% return in US dollars terms during the past five years. Some 82% of the portfolio is currently made up of equities, with country breakdowns being China 33,6%, Taiwan 26,9%, Hong Kong 13,9%, and the UK 6,4%. The biggest sectors of investment are technology and hardware equipment 11,21%, telecommunications 11,1%, and banks 10,3%.

Seven of the 11 China funds tracked by rating agency, Morningstar, have at least a quarter of their assets in other Asian stocks outside China and Hong Kong, and about three of the 11 have about half their assets in non-Chinese stocks.

Fund manager of the Templeton China Fund is Dr Mark Mobius, a pioneer of developing markets investing and old friend of SA, who has led the Templeton emerging markets team for over 15 years. The average tenure of team members is seven years. The fund has an S&P 4-star ranking.

I haven't investigated the Sanlam Asia Pacific Fund of Funds, but it certainly seems to be flying at present - 18% return in rand terms on six months and 23% over 12 months. Less attractive is the 4,7% three-year aggregate figure.

Leon Kok writes for publications in the United Kingdom, the United States and Switzerland, in addition to local periodicals such as Finance Week. He writes in his personal capacity and views and comments should not be considered to be advice. If you are unsure which unit trusts to invest in please consult a financial advisor.