How to invest in risky sectors

09 March 2018

There are various ways to seek returns from specialised and adventurous sectors, if you’re prepared to accept the risks involved.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Which sectors may add some spice to your portfolio.
  • Why it’s important to consider the risks involved.
  • How to gain exposure to a range of investment sectors.

Investors with a strong appetite for risk might want to consider ways to make their portfolio more adventurous, with plenty of options to add some spice to their investments.

There is an array of investment sectors and specific industries that may offer potential for long-term gains, but these aren’t for the faint-hearted, as they come with a greater than average degree of risk.

Here, we explore some of the pros and cons of four less conservative investment opportunities, but remember that if you’re unsure where to invest, you may want to seek professional financial advice.

It’s particularly important that investors keen to explore potential returns from riskier investments remain focused on their long-term goals, to help ride out any potential volatility. Barclays Smart Investor doesn’t offer personal investment advice. If you’re unsure, seek professional financial advice.

Emerging markets

Foreign investors poured $30 billion into emerging markets in January 2018, a seven-month high and the strongest start to a year since 2015, according to the Institute of International Finance (IIF).1

Emerging markets are typically rapidly developing economies and as such they can be particularly volatile. Yet for the adventurous investor, prepared to accept the greater risk of getting back less than they put in, the long term rewards could potentially be high from this sector or economies.

There are a number of factors that may appeal to more adventurous investors, with countries such as China and India benefitting from a growing middle class and young populations, alongside economic growth, and a growing range of dynamic companies within these markets.

Emerging market company earnings are also growing rapidly, at a faster pace than those of firms in developed markets, and there are plenty of innovative companies in the technology sector, for example, offering potential for investors.2

Yet these countries have particular vulnerabilities that investors should be aware of, such as being impacted by US interest rate rises, given their tendency to borrow in US dollars. They may also be prone to turbulent politics, while a downturn in commodity prices culminated in recessions in some of the largest countries, such as Brazil and Russia, but this appears to be easing. US president Donald Trump’s proposal to introduce tariffs on imports from China also caused concern, and there is the potential for Trump’s future policies to derail the bull market in emerging markets.3

Smaller companies

Typical examples of smaller companies include house builders and retailers, which, compared to their larger counterparts listed on the FTSE 100 index, have a greater focus on the domestic economy. Smaller companies are often listed on the Alternative Investment Market (AIM), a sub-market of the London Stock Exchange.

These minnows may offer some defence against any stock market jitters during an uncertain economic climate as the UK negotiates its way out of the EU, following the Brexit vote. That’s because they are less likely to be impacted by changes to global trade agreements, alongside the potential to grow rapidly in a challenging environment, given their typically innovative and dynamic nature. Larger companies are also likely to be attracted to the qualities of profitable smaller firms, snapping them up to expand their businesses, with a large amount of M&A activity in the sector.

Of course, there are also plenty of risks, with the potential for smaller companies to fall into difficulties, or even go bust, if they don’t have enough cash on their balance sheet to shore up their books during difficult times. It may also be harder to sell shares in smaller companies, and particularly for the price you want, with fewer potential buyers willing to take them off your hands, compared to larger firms.

Natural resources

Global demand for natural resources such as oil, natural gas, base and precious metals from both emerging and developed markets remains strong. For investors, natural resources can make an appealing portfolio diversifier as they tend to perform differently to other assets during rocky market conditions.

The main drivers behind the value of natural resources are supply and demand, with prices generally rising alongside the cost of living, making them also a potential hedge against inflation. Many commodity prices have risen with inflation, followed by the share prices of companies that have benefited from this increase, and are expected to rise further, according to the World Bank.4

However, prices remain volatile, with the potential to suffer from, for example, a falling oil price if a surge in global oil supply overtakes demand. Yet a global economic recovery may support the price of oil and other commodities going forwards, although of course, this isn’t guaranteed.

Healthcare and biotech

Developments in the healthcare industry may provide an opportunity to investors, given the advance of new medicines, coupled with an ageing global demographic.

After struggling for a few years in 2015 and 2016, biotech stocks staged a comeback in 2017, and are off to a strong start in 2018, with the NASDAQ Biotechnology index continuing to climb.5 However, remember that this shouldn’t be seen as a guide to future performance, and you could lose as well as gain money in this, or any other investment sector.

The US is generally at the forefront of developments in biotechnology, with companies such as Amgen and Celgene making up a large part of specialist funds within the sector. Clinical trials for new treatments are constantly being done, with plenty of advancements in cancer treatment, and blood conditions over recent years. However, while there is the chance of exciting new healthcare developments, remember that these may fail, and you need to be comfortable accepting this risk.

How to invest

There are plenty of funds to choose from in these more adventurous, higher risk, sectors, although remember that each should make up a small proportion of a diversified portfolio.

For example, funds providing exposure to emerging markets include the Aberdeen Emerging Markets fund, or the Fidelity Emerging Markets fund. Remember to factor in currency risk when investing overseas, meaning that if sterling weakens, your returns and holdings from overseas investments will increase, whereas if sterling strengthens, conversely, your returns and holdings will fall in value.

There are plenty of smaller company funds on offer too, although one way of gaining exposure to this sector is through a passive exchange traded fund (ETF) or tracker fund that tracks the performance of the small cap index.

Find out more about Exchange Traded Funds and tracker funds

Turning to natural resources, there are also several resource-focused funds known as exchange traded commodities (ETCs). Among the most popular funds in the natural resources sector are the First State Global Resources fund, and the JPM Natural Resources fund.

Within the healthcare sector, there are several funds focused on the biotech industry, such as the Polar Capital Biotechnology fund, and the Axa Framlington Biotech fund.

Please bear in mind that our referring to these funds should not be considered advice or a personal recommendation. If you’re unsure where to invest, seek professional financial advice. Remember that investments can fall as well as rise, and you could get back less than you originally invested.

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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

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