by Tom Taulli | October 22, 2012 1:15 pm
The negative sentiment surrounding the markets has been so negative at points this year, you could cut it with a knife. Economic growth remains sluggish here and across the world. Unemployment is making gains but still is disappointingly high. Europe seems to take as many steps forward as steps back.
Still, investors can find pockets of life if they look down the road enough years. Regardless of the headwinds facing markets today, there’s a number of huge demographic, technological and other trends that will play out one way or the other. And where there’s mega-trends, there’s mega-winners.
Of course, trying to find a single company that could rocket on a mega-trend can amount to something of a gamble. Thus, one of the best ways to invest in a trend is through a mutual fund or exchange-traded fund, where you can spread the risk across a number of players.
Here’s a look at five such mega-trends to look for, as well as what funds are set up to benefit as a result:
Trend: Alternative Energy
Alternative-energy stocks can be an absolute minefield, as evidenced by the huge declines in solar stocks like First Solar (NASDAQ:FSLR), or the recent bankruptcy of electric-vehicle battery maker A123 Systems (NASDAQ:AONE).
Still, that doesn’t change the fact that the world’s current top sources of energy will eventually run out, and that finding new sources is becoming increasingly more expensive. That means a bright long-term future for the alternative energy sector.
To get exposure to the alternative energy space, investors should take a look at the PowerShares WilderHill Clean Energy Portfolio (NYSE:PBW) exchange-traded fund. PBW is based on an index comprised of companies that “focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.”
Clean Energy Portfolio has exposure to segments like semiconductors, electrical equipment and instruments and components. Some of the top holdings of the fund include KiOR (NASDAQ:KIOR), First Solar, EnerNOC (NASDAQ:ENOC), Polypore International (NYSE:PPO) and Air Products & Chemicals (NYSE:APD).
Unsurprisingly, PBW’s returns have been terrible as of late; the fund is off by more than 20% this year alone. But again, this fund is for those who are willing to take the long-term view on things.
PBW charges 0.7% in expenses and has about $125 million under management.
Trend: Baby boomers/aging populations
Since the 1970s, healthcare expenditures have doubled as a percentage of GDP, reaching about 16%. At the same time nearly 10,000 people become eligible for Medicare every day.
Keep those figures in mind whenever pundits weeble and wobble over healthcare-based legislation coming down from Capital Hill. Health-related spending is going to remain strong in the U.S., one way or another. Not to mention, large, aging populations aren’t just an American phenomenon — parts of Asia and Europe are experiencing the exact same thing.
One of the top mutual funds in the healthcare space is T. Rowe Price Health Sciences (MUTF:PRHSX).
Kris Jenner, who manages PRHSX’s more than $5 billion in assets, likes to focus on mid- and small-cap companies — especially those that have the potential for creating blockbuster drugs, which in turn help create blockbuster returns. Some of the fund’s top holdings include biopharma outfits like Alexion Pharmaceuticals (NASDAQ:ALXN), Pharmacyclics (NASDAQ:PCYC) and Gilead Sciences (NASDAQ:GILD).
Despite his penchant for smaller firms, Jenner still takes a buy-and-hold approach, reflected in a low turnover rate of about 23% for PRHSX. Fees also are a low 0.82%.
This year, the fund has posted a stellar return of 33.5%, but that’s hardly a fluke. PRHSX has averaged roughly 14% returns over the past decade, helping the fund earn Morningstar’s top rating of five stars.
Trend: Water scarcity
The world’s population is expected to boom from 7 billion people in 2012 to 10 billion people by 2050. That’s going to put the screws to natural resources, and fresh water is among one of the biggest concerns.
After all, you don’t just need fresh water for drinking — you need ample supplies to keep pace with agriculture, manufacturing and other purposes.
To play this trend, consider the PowerShares Water Resources (NYSE:PHO) ETF. The PHO, which has roughly $800 million in assets under management, is based on an index of 31 companies that “create products designed to conserve and purify water for homes, businesses and industries.”
PHO’s holdings span categories like utilities, industrial equipment and chemicals. Top names include pumps-and-valves manufacturer Flowserve (NYSE:FLS), utility stock American Water Works (NYSE:AWK) and analytical instrument maker Waters (NYSE:WAT).
PHO has performed respectably in 2012, slightly beating the markets with a 15% return at a charges of 0.62% in expenses.
Considering its nature, technology always will be a mega-trend of sorts, if you think about it.
Right now, there’s a variety of new and emerging segments with tremendous promise, including cloud computing, mobile and Big Data.
A fund that specializes in riding these waves is the Buffalo Discovery Fund (MUTF:BUFTX) — but it does so in an outside-the-box way.
Portfolio managers Clay Brethour, Dave Carlsen and Elizabeth Jones don’t focus so much on traditional tech stocks so much as they look at numerous sectors — including financial services, healthcare and industrials — for companies on the cutting edge of technology. utilize a broad-based interpretation of technology.
Naturally, that results in a diverse set of holdings. Top weightings in the fund include familiar tech names like Apple (NASDAQ:AAPL) and Oracle (NASDAQ:ORCL), healthcare-related businesses like dentistry-focused Align Technology (NASDAQ:ALGN) and injectables firm Hospira (NYSE:HSP), and even seedmaker Monsanto (NYSE:MON).
This innovative strategy has worked quite well. BUFTX has returned 17.8% year-to-date and has averaged 14% returns over the past three years.
BUFTX charges 1.01% in expenses and also garners Morningstar’s five-star rating.
Trend: African Growth
Investors have made tidy sums for decades by plunking their money down in Asia’s emerging markets. But now, there might be a geographical shift of opportunity — to Africa.
The continent of Africa is actually second to Asia in terms of both land area and population. It’s rich in resources like oil and platinum. And most importantly, its countries are seeing positive moves toward economic reform.
Among the handful of funds seeking to profit off Africa, one to consider is the Nile Pan Africa Fund (MUTF:NAFAX). Portfolio manager Larry Seruma analyzes all 53 nations in Africa to find undiscovered growth opportunities. The portfolio is about 25% weighted in financial services, but also has significant weightings in energy, industrials, consumer and materials stocks. Top holdings include tech firm Pinnacle Technology, as well as energy firms Africa Oil (PINK:AOIFF) and Afren (PINK:AFRNF).
NAFAX is pricey, though. A-class shares cost 2.5% in expenses plus a 5.75% load fee. C-class shares (NAFCX) have no load fee but charge a whopping 3.25% in expenses.
Nile Pan Africa also is a small fund, at just $16 million in assets, but NAFAX’s screaming 38% returns year-to-date in 2012 could help it attract more interest.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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