Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 499

Finding your investment niche

Comedians are a foul-mouthed bunch though their humour can bring nuggets of wisdom. In his latest Netflix series, Australian-born, US-based Jim Jefferies, recalls a recent trip back to his homeland.

“I just got back from touring Australia; the whole place was flooded. Remember three years ago, the whole place was on *** fire. Remember that, just before Covid, all of Australia was on fire, and we’re all like, “The world can’t get any worse than this”.

People died. People lost their homes. But the only thing reported in North America about the fires was … the koalas, yes. You all seemed very concerned about the koalas…

The koala is the laziest animal on earth. It sleeps for 22 hours a day. The sloth sleeps for 21.

It only eats eucalyptus leaves. Eucalyptus leaves are its source of food and water. There is a chemical in eucalyptus that reacts the same way to them that THC reacts to us. So, they’re stoned all *** day.”


Source: Netflix

In his off-beat way, Jefferies highlights that the koala is not only an adorable animal but a highly specialized one. It’s found a way to survive over thousands of years by finding a niche: only feeding on the leaves of eucalyptus trees. It’s restricted to areas that have eucalyptus trees i.e., certain parts of Australia. And some koalas specialize even further by only eating leaves from one or two specific trees.

Eucalyptus leaves are poisonous to most animals and humans. Consequently, koalas have little competition when it comes to living off these leaves. The downside is that the eucalyptus leaves have limited nutritional value. That’s why koalas have little energy and sleep so much.

Most other animals also find a niche – a method of behaving and competing for survival. They usually select one for which they’re best adapted. If they compete for the same niche with other species, then they risk limited resources running out. That’s how species become extinct.

Today, we’re going to talk about biological niches, how they may apply to markets, and how understanding them can help you become a better investor.

Ecological niches

In ecology, there are two types of niches: general and specialist. Classifying a species as a generalist or a specialist is a way to identify what kinds of food and habitat resources it relies on to survive. Generalists can eat a variety of foods and thrive in a range of habitats, while specialists have a limited diet and stricter habitat requirements.

Koalas are specialists. Another example of a specialist is the Canada lynx (pictured below). Unlike koalas, the lynx is a carnivore. It preys on snowshoe hare that are mainly found in forested, mountainous areas. The lynx has adapted to hunt in deep, soft snow.


Source: National Geographic

Raccoons are an example of a generalist species. Raccoons can live in a diverse range of environments. They live in large cities, mountains, and forests throughout North America. And they can eat a variety of foods – everything from eggs, to nuts and fruit, and even insects, frogs, and human garbage.

Niches aren’t just confined to the animal world; they’re also found in plants. Some plants need a narrow range of rain, soil conditions and temperatures to survive, while others don’t. For example, a cactus is a specialist species as it will die if it gets too much water or if it spends time during winters at high altitudes.

There are pros and cons to being specialist and generalist organisms. Specialists have more clearly defined niches and encounter less competition from other species. But when environmental conditions change, they can struggle to survive if they don’t adapt quickly.

Generalists have more competition from other species and therefore less resources to source. Yet, they are more adaptable to changes in the environment than specialists. This has been particularly advantageous with the acceleration of climate change in recent years.

The ideal business

This distinction between generalists and specialists can be applied to the business world. Some businesses thrive by being highly specialized and operating in an environment with little competition. Former investment newsletter writer, Richard Russell, once told a story of such a business:

“I once asked a friend, a prominent New York corporate lawyer, “Dave, in all your years of experience, what was the single best business you’ve ever come across?” Without hesitation, Dave answered, “I have a client whose sole business is manufacturing a chemical that is critical in making synthetic rubber. This chemical is used in very small quantities in rubber manufacturing, but it is absolutely essential and can be used in only super-refined form.

My client is the only one who manufactures this chemical. He therefore owns a virtual monopoly since this chemical is extremely difficult to manufacture and not enough of it is used to warrant another company competing with him. Furthermore, since the rubber companies need only small quantities of this chemical, they don’t particularly care what they pay for it — as long as it meets their very demanding specifications. My client is a millionaire many times over, and his business is the best I’ve ever come across.” I was fascinated by the lawyer’s story, and I never forgot it.”

This business has, in Morningstar’s parlance, an economic moat, or sustainable competitive advantage. Because of the moat, it presumably generates a high return on capital.

Specialist businesses can be highly profitable. Though like in the ecological world, changes in the environment can prove their undoing. For instance, the business above could have a competitor move in with the production of a similar chemical. Or synthetic rubber may go out of fashion in favour of a superior product. In these cases, the business would have to adapt or die.

Other businesses are generalists rather than specialists. Think of large conglomerates like Wesfarmers. Or the big four banks. Or for that matter, giant resource companies such as BHP and Rio Tinto.

All these companies operate across multiple segments. If one segment doesn’t have a bright future, they can invest in another one that may provide a better return on capital.

Yet, because they’re generalists, they compete against many other companies. And this competition brings lower returns as the products are largely commoditized.

Investment niches

Niches are also present in the investment world. Generalists include multi-asset funds, most Australian equity funds, and macro funds. In the case of multi-asset and macro funds, they trade across a broad range of asset classes. If one asset class isn’t doing well, they can invest in an alternative class.

Most Australian equity funds are generalists. They trade the whole, or large parts, of the market. For instance, if they take a dim view of banks, they can switch into commodities or industrials.

All these funds are highly adaptable. But they compete against many other funds and ETFs which are trading the same stocks.

Then there are specialist investors. Think of micro-cap funds, arbitrage funds, specialist property funds, and a host of others. These investors focus on a small segment of the market, where the competition is less crowded. They hope that gives them a sustainable edge.

Specialised investing can be difficult. Consider value funds since the GFC. Value focuses on buying stocks cheaply. This style of investing has been out of vogue for 15 years, while so-called growth investing has thrived. It’s been almost impossible for value funds to keep up with their benchmarks and many have shut down because of this.

What can the average investor learn from this?

As an individual investor, you need to decide whether you want to be a generalist or a specialist. That decision entails knowing yourself and what you might be good at. It also entails how much time you can devote to investing.

Being a generalist is a lot of work as it requires being across the whole market and all its businesses. For the average investor, that requires too much time.

There is the option of outsourcing your investing to a generalist fund or an ETF which covers the broader market.

If you choose to invest yourself, then it’s easier focusing on one or two segments of the market. One idea is to devote your time to an industry where you have some background knowledge. If your background is in insurance, perhaps you should focus on insurance companies and brokers. Or if you’ve had experience in retail, the retail sector would be a great area to apply your knowledge. Or if you have owned businesses in the past but don’t want to compete against the big institutional funds, then companies with market capitalisations under $50 million may be a happy hunting ground.

Investing in what you know can give you an edge over the competition, as Peter Lynch outlined in his famous 1989 book, One up on Wall Street.

 

James Gruber is an Assistant Editor at Firstlinks and Morningstar.

 

  •   8 March 2023
  • 1
  •      
  •   

RELATED ARTICLES

Is currency exposure an unwanted risk or source of returns?

Five principles from the lost decade of value investing

Identifying value for money in active management

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.