Three exciting funds to buy now

David C Stevenson tips three exciting funds for daring investors on the themes of emerging markets, cybersecurity, and seeking value.

Feeling daring? Then venture into my three tips.

This week I have three ideas some more opportunisticthan others drawn fromthe world of exchange-traded funds (ETFs)and investment trusts. One is a play on emerging markets, one is an adventurous punt on cybersecurity, and the last a good vehicle for seeking value.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

1. Gamble on emerging markets

Let's get stuck straight in with a fund I've covered before Utilico Emerging Markets (LSE: UEM). This investment trust (which I own) invests in infrastructure-orientated businesses throughout the developing world.

Its track record suggests it has captured returns from emerging markets far more efficiently than more established names, such as the Templeton Emerging Markets trust. It also has a strong income focus, with a dividend yield of around 3.5%.

Advertisement
Advertisement - Article continues below

Emerging markets have been getting a thorough kicking amid China's challenges and fretting over rising US interest rates but this squall will pass,as they all do. When that happens(maybe next year), the turnaround will be sharp. One interesting way to play it could be the subscription shares issued by Utilico a few weeks back. In effect, subscription shares are an upside warrant or option on an underlying ordinary share price.

At specific dates (usually annually, or every six months) you get the chance to convert your subscription shares into ordinary shares at a fixed price. These options are effectively a geared way of playing a bounce in the price. They don't pay any dividends and they are a gamble on the price going up. So let's see how they work so we can decide if the gamble is worth the risk.

Utilico's managers have issued 42 million of these subscription shares (subs) to investors, giving them the option to transfer into ordinary shares at a price of 183p. This transfer can happen "on the last business day of each of February 2016, August 2016, February 2017, August 2017 and February 2018". But you don't have to be an existing shareholder to buy the subs. You can buy them for 11.5p (at the time of writing) under the ticker UEMS.

Here's how it works. The ordinary shares currently trade at 158p. So if you buy a subscription share with the intention of converting into the ordinaries over the next few years, the share price needs to rise above 194.5p before you make a profit (11.5p to buy the subs, then 183p to subscribe for the ordinaries). That's a big ask it assumes a 20%-plus rise in the ordinary share price. But if sentiment shifts, I reckon we could see a big rebound, and it's worth noting that the share price has been above 200p at times.

So let's say the share price rises to 205p. At that point, the subs would be worth 22p a share (205p less 183p), near-doubling your initial 11.5p investment.Of course, the reverse could happen too the ordinary shares could keep falling, leaving the subscription options toexpire worthless. In short, you could lose 100% of your investment far more easily than if you bought the ordinary shares outright. My feeling is that we may not have seen the worst for emerging markets yet, so the subs could fall further but I'd be a buyer at 7p.

2. A focused play on cybersecurity

Another idea for the adventurous is a new exchange-traded fund from ETF Securities that we mentioned here last week the ISE CyberSecurity (LSE: ISPY) fund. The focus obviously is cybersecurity. More than half of the businesses the fund tracks are software outfits, such as Sophos and Trend Micro, but network equipment businesses such as Juniper and Cisco also make the list. Some investors find these theme funds a bit 'faddish', but they have their virtues, as long as you're selective.

Advertisement
Advertisement - Article continues below

One problem with investing in many tech funds is that you end up with a portfolio dominated by Apple, Google and Microsoft. There may be nothing wrong with that, but it's too broad for some. So I think there could be real mileage in being focused on cybersecurity specifically the market is only going to get bigger and investing in some smaller businesses.

3. Back a true contrarian

Finally, keep an eye on Aurora Investment Trust (LSE: ARR). This fund has seen better days. But now the directors seem to have decided to turn it into a vehicle for Phoenix Asset Management, run by Gary Channon. I've known Channon for some time. He's one of the UK's most interesting value fund managers. Private investors can't get into his existing private fund as it's only marketed at institutions and high-net-worth individuals so the decision to use Aurora as a new listed vehicle is interesting. Channon is a hugely focused stockpicker who has made big, successful bets on a whole range of businesses including Sports Direct at its nadir and the housebuilders after 2009.

Details are due out in the next few months so there's not much more to say right now. And the shares aren't very liquid when I rang my own broker at Hargreaves Lansdown, they observed that there are no electronic market makers and so you'd have to leave open a "fill or kill" order. The restructuring will involve dealing with this issue but if everything goes to plan, we could be about to get access to a very experienced, contrarian UK stockpicker who can give stars such as Nick Train and Andy Brough a real run for their money.

Advertisement

Recommended

Visit/504054/the-power-of-mean-reversion
Funds

The power of mean reversion

When it comes to investing in funds, don’t chase the top performers – look for the cheapest ones.
1 Apr 2019
Visit/503809/investing-in-funds-the-most-important-number-to-look-at-before-you-buy
Funds

The most important number to look at before you buy any fund

Many investors get distracted by past performance when they buy a fund. But there’s something else to consider that will have a much bigger influence …
22 Mar 2019
Visit/investments/funds/investment-trusts/600757/why-investment-trusts-are-the-best-vehicle-for-your
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600790/asian-income-stocks-where-to-find-the-continents
Share tips

Asian income stocks: where to find the continent's top money machines

International dividends shouldn’t only mean companies in the US or Europe – the Far East has plenty of big payouts to offer. Cris Sholto Heaton looks …
6 Feb 2020

Most Popular

Visit/investments/stocks-and-shares/600863/sirius-minerals-anglo-american-takeover
Stocks and shares

Do you own shares in Sirius Minerals? Here’s what you need to do now

Mining giant Anglo American has proposed a cash takeover of Yorkshire-based minnow Sirius Minerals. Unhappy shareholders must decide whether to accept…
20 Feb 2020
Visit/investments/commodities/gold/600874/gold-is-at-its-highest-level-in-years-heres-how-to-invest
Gold

Gold is at its highest level in years – here’s how to invest

Gold's rise at a time when the dollar is unnervingly strong isn't unheard of – but it is curious. John Stepek explains what's going on, and what it me…
21 Feb 2020
Visit/investments/stocks-and-shares/share-tips/600843/share-tips-of-the-week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
21 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020