- Head of Multi-Asset Strategy – EMEA
United States, Institutional
Change
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What do electric vehicles, student loan providers and cybersecurity companies have in common? Not much, on the face of it. However, they could each be considered thematic investments: companies that stand to benefit from long-term structural forces shaping the world, such as climate change, population growth or digitalisation.
Investing in these powerful trends could be a compelling prospect for investors looking to build wealth over the long term, especially against the current macroeconomic backdrop of greater volatility, higher inflation and more frequent economic cycles.
Why include thematic investments in a portfolio?
Today’s new and fast-changing macroeconomic regime will likely see investors face shorter and more pronounced cycles, as well as greater idiosyncratic risk. Yet disruptive trends with structural tailwinds can help investors turn change into an advantage. We think the characteristics of the current environment create a persuasive case for a thematic approach:
For a more cyclical world — An investor’s ability to time the cycle has historically been an important facet of investment success. In an era of more frequent and less predictable cycles, market timing may become more challenging. Thematic investments, which are driven by structural change rather than strong economic growth, could offer a way to reduce the importance of the cycle. This is supported by our research comparing the cyclicality of global equity sectors and global equity themes (Figure 1). Thematic allocations could also help increase diversification given how much cyclical exposure is typically found in a portfolio.
Figure 1
For a higher-inflation world — Thematic allocations may also help with other portfolio construction goals such as inflation mitigation — a goal that is likely to be of increasing interest to investors against a backdrop of structurally higher inflation. For example, climate change is likely to be a key structural driver of inflation; an allocation to thematic climate-change-related investments may help to mitigate its impact on a portfolio while also helping to meet sustainability objectives.
For a changing world — Traditional market-cap equity benchmarks are, by definition, backward-looking, with the weight of each company in the index determined by its historical performance. The inherent forward-looking nature of thematic investments allows greater exposure to structural change and future growth. This may be particularly relevant in emerging markets, where benchmarks often do not capture fast-moving economic growth. A thematic approach may lead investors to tomorrow’s beta, rather than yesterday’s winners.
For a less predictable world — Thematic investments may allow allocators to exploit perspectives that other investors either tend to ignore or are not able to focus on because of, for example, prescriptive sector and style classifications. A larger proportion of the risk taken by thematic managers relative to non-thematic managers is driven by idiosyncratic factors rather than sector and style. This can help thematic managers avoid investment blind spots.
For a better world — Thematic investors think about the world differently, choosing to look beyond traditional metrics of economic progress, such as GDP growth, and instead take a more holistic view, focusing on how economies are progressing towards a more inclusive and innovative future. Such a view reorientates investments away from sectors that are typically the beneficiaries of early economic progress — such as energy and banks — and towards the enablers of structural economic development — such as renewable energy and microfinancing companies. We have identified 15 global themes today that we believe are aligned with this investment opportunity.
Figure 2
Three thematic opportunities to watch
Examining the investment universe with a thematic lens can generate some exciting potential investment opportunities. Here, we highlight three themes that we think offer potentially attractive entry points for longer-term-focused portfolios:
The transportation sector is being turned on its head by two major trends: the rise of electric vehicles (EVs) and the growth in vehicle technology. We expect this theme to play out for some time, likely driven by the need to decarbonise transport systems and the favourable total cost of ownership for EVs relative to internal combustion engine vehicles.
Key potential beneficiaries: EV manufacturers, companies throughout the battery supply chain, providers of semiconductors and hardware for connectivity and autonomous driving technology.
We believe education will see a decade of spending and growth unmatched by any since the post-World War II boom. Population growth will drive demand for education, especially in the developing world, where take-up of tertiary education has historically been low relative to the developed world. Meanwhile, the way we work is changing. Technological advances are creating an imperative for employees to upskill. Automation will render some job functions unnecessary, and affected employees will need to retrain entirely. The education industry itself is experiencing rapid change, with the rise of online learning broadening access to education and creating opportunities for disruptive companies.
Key potential beneficiaries: providers of tertiary education, such as universities, as well as companies that support students, such as student loan companies and housing providers; companies fulfilling the need for workforce reskilling or upskilling.
A new era in enterprise intelligence, with cloud-backed artificial intelligence (AI), is set to transform the way enterprises operate. Large-scale migration to the cloud is laying the groundwork for companies to exploit AI and machine learning, as access to large datasets helps the development of sophisticated AI programmes. Rising wages and skilled worker shortages will accelerate the adoption of AI, as companies seek to reduce labour costs and increase productivity. However, increased digitalisation will mean that companies will need to invest heavily in cybersecurity to avoid reputational and financial risk.
Key potential beneficiaries: a variety of companies within the software sector, including providers of cloud-based and AI software solutions, companies that are enabling advancements in AI and providers of cybersecurity software.
What do investors need to know?
A thematic approach may offer the potential for above-average returns that cannot easily be explained by traditional country, sector or style factors. However, as with any investment theme, implementing this approach requires deep research and expertise in not only identifying the right long-term trends but also finding companies that are well positioned and poised to benefit from them. Themes take time to play out, so investors should be prepared to assess performance over a longer time frame, as well as understand associated risks, such as regulatory change and ESG considerations. However, we believe that there is a significant opportunity within thematic investments for long-term-oriented investors looking to build wealth over the long term against a backdrop of increased volatility.
To read more of our research around thematic investing and our framework for sizing and assessing allocations, access our white paper. You can also read more about each of the three themes we highlighted: transportation, education and enterprise intelligence
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By
Andrew Heiskell
Nicolas Wylenzek