Investing in Leisure Funds

Mutual funds specialize in just about every sector of the economy that one can imagine. With that in mind, it's no surprise that a growing number of funds invest in fun!

From world travel and cable television to gambling and alcohol, if it involves ways to spend your discretionary income, there might be a mutual fund or exchange-traded fund (ETF) looking for ways to invest in the idea. Read on to find out how fund managers invest in these funds. (See also: Mutual Funds.)

The leisure sector expands on the idea of sin funds. Sin funds often limit their scope to alcohol, tobacco, firearms and other potentially controversial areas whereas leisure funds expand this scope to maintain a measure of diversification, seeking to invest in areas where consumers focus their non-essential spending.

Entertainment, travel, luxury goods and even fast food restaurants, newspapers and magazines can fit into a leisure or luxury portfolio. Jewelry from Tiffany's and burgers from McDonald's could sit right beside Coach handbags and Hilton hotels on the list of items that fund managers are tracking. (See also: Commodities That Move the Markets.)

The market for these portfolios is dominated by a small number of big players, including mutual fund giants Fidelity and AIM, as well as Invesco, Rydex and PowerShares. These giants are seeking to tap into a broad range of opportunities in the global marketplace.

In the U.S., consumers have an appetite for cars and cruises. The emerging middle class in China is engaging in international travel. In Russia, the nouveau riche are sipping champagne and buying jewelry. Whoever they are and wherever they are, consumers are spending money on more than just the basics, and corporations are profiting from their purchases. (See also: McMansion: A Closer Look at the Big House Trend, and What Determines Gas Prices?)

To make money in the leisure and luxury market, fund managers favor two approaches:

Active Management: This approach lets the fund managers buy and sell at will, looking for the best places to invest regardless of where they are, what they are or what they do to make money. 

The following are the pros and cons to this methodology:

• Active management correctly anticipating market changes and adjusting investments accordingly can allow investors to significantly beat the market.
  
• However, being influenced by misleading factors, such as last year's performance or the behavior of other investors, can make realizing these gains impossible. (See also: Why Fund Managers Risk Too Much.)

Index Investing: This approach offers a more passive methodology. In the leisure market, the indexes are proprietary. Instead of tracking an industry bellwether, such as the Dow Jones Industrial Average or the Standard & Poor's 500 Index, the fund managers develop their own indexes, dividing the portfolio among various industries. A specific percentage of assets might be dedicated to hotels, resorts and cruise lines while another percentage is dedicated to casinos and gaming, another to movies and entertainment and another to restaurants.

After the percentages are chosen and an asset allocation model is created, the portfolio is invested to match the model. If the model consists of 10 categories and calls for 10% to each category, the money is invested accordingly. If a specific sector is outperforming all others (or is losing money), the portfolio manager still adheres to the model. (See also: The Lowdown On Index Funds.)

The following are the pros and cons to this methodology:

• Index approaches tend to very low-cost in terms of management fees, because not much management is needed.
  
• However, an index fund may miss some standout opportunities because it does not seek out any one stock. It seeks a blend of stocks. 

Leisure and luxury are always in demand. Although not everyone will drive a Bentley or book a penthouse suite at the Ritz, many of us can scrape together enough cash for an exotic microbrew, a special perfume or just a meal at a fast-food restaurant.

While the lower end of the luxury scale can seem mundane to those living in developed nations, the opening of fast-food outlets in emerging-market countries is a big deal to those global citizens getting their first taste of what many think of as "the good life." (See also: What Is an Emerging Market Economy?)

As economic cycles come and go, and the lower end of the leisure market suffers from people having less money for fun when times are tough, the pursuit of a good time and the good life are universal goals. Globalization continues to spread capitalism around the world, the appetite for luxury goods and entertainment is almost certainly going to expand and not going to disappear. As long as consumer demand creates a market for fun, fund managers will find a way to invest in it. (See also: Globetrotting on a Budget and Seven Saving Tips for Summer Getaways.)