• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>How to Avoid Unpleasant Surprises

Related Content

  1. Videos
  2. Articles

How to Avoid Unpleasant Surprises

Buying a country or sector fund isn't as easy as it seems.

Gregg Wolper, 03/01/2010

If you want to bet on a specific country or sector, it's tempting to think any fund that focuses on the area in question will do. But even funds that seemingly target the same narrow niche typically are far from interchangeable. As with more diversified funds, it's important to investigate the available choices--their portfolios, strategies, and more--in order to find the most suitable match for you.

Different Paths to India
India has received much attention from investors, owing to its rapid growth rate and (except for that nasty slide during the recent bear market) its astounding stock-market gains. But the funds that target that country--and there are many options to choose from, both open-end and exchange-traded--don't necessarily resemble one another. If you're looking for a large-cap fund that will own the big, recognizable companies, for example, some of these funds aren't appropriate at all.

Take Matthews India MINDX. Typifying the funds offered by this Asia-focused fund firm, Matthews India takes an all-cap approach, owning plenty of lesser-known stocks. Its median market capitalization is only about $3 billion. According to Morningstar's breakdown, more than half of its assets are in mid-caps, with a few small stocks mixed in. The fund has at least some exposure to every sector. No stock gets more than 5% of assets, and while the major firms Reliance and Infosys show up in the top 20, they get only 3% and 4% of assets, respectively.

Compare those percentages with JPMorgan India JIDAX. If you want to focus--really focus--on the big names of India, this is the fund for you. It has a whopping 12% of assets in Reliance Industries, another 12% in Infosys, and about 6.5% each in dominant banks HDFC and ICICI. Two branches of the Tata conglomerate also appear in its top 10. This fund's median market cap is $14 billion--nearly 5 times the figure for the Matthews portfolio--and the JP Morgan offering has far less exposure to mid-cap and small stocks. It also stays out of several sectors completely.

This phenomenon isn't limited to India funds, of course. In fact, the roughly 20 open-end China funds differ from one another even more than those that concentrate on India. Some of those funds buy and sell China stocks directly on the mainland's stock exchanges, while others do not. At least one fund targets fast-growing small and midsize firms, while another places a priority on income. These and other distinctions can result in very different portfolios.PAGEBREAK

The Health-Care Alternatives
You'll also find extensive variations among sector-specific funds. For example, the two biggest health-care offerings, Vanguard Health Care VGHCX and T. Rowe Price Health Sciences PRHSX, are both good funds with long-tenured managers. But the Vanguard fund focuses much more on the largest stocks in the field, takes more of a value-leaning approach, and has rock-bottom turnover levels. The T. Rowe fund follows a growth strategy, features far more picks in the biotech arena, and owns fewer household names. Its median market cap is less than one third the size of the Vanguard fund's.

These two funds' portfolios illustrate the vast gulf between their strategies. Vanguard Health Care features pharmaceutical giants Merck MRK, Pfizer PFE, Eli Lilly LLY, AstraZeneca AZN, Roche RHHBY, and Sanofi-Aventis SNY in its top 10. But four of those major players--all save Merck and Roche--get only token investments from T. Rowe Price Health Sciences or don't appear in the portfolio at all. Conversely, Gilead Sciences GILD and Alexion Pharmaceuticals ALXN--the top two holdings for T. Rowe, with about 9% of assets between them--are virtually ignored by Vanguard's fund, which has a scant 0.15% of assets in Gilead and nothing in Alexion.

Then there's Prudential Jennison Health Sciences PHLAX, another appealing fund. That one steps even further down the market-cap ladder than T. Rowe's offering and delves even deeper into the biotech sphere. One stark example that illustrates the gulf between Vanguard Health Care and Prudential Jennison Health Sciences is that the former fund invests about 2% of assets in small- or microcap stocks, while the latter has roughly 40% of assets there.

blog comments powered by Disqus
Upcoming Events
Conferences
Webinars

©2014 Morningstar Advisor. All right reserved.