Thematic investing offers exposure to some of the major socioeconomic, environmental and technological themes of our times. It has increased in popularity over the years and is now more accessible than ever with an abundance of managed investments to cover a range of themes and trends. With clients increasingly interested in using them, how do you incorporate thematic investing within their portfolios?
WHAT IS THEMATIC INVESTING?
Thematic portfolios follow a top-down approach to investing. They look at long-term macro trends, such as robotics and automation, and then use various screens and information sources to identify the companies or assets which support this trend through infrastructure or services.
Thematic investing is sometimes confused with sector investing. Thematic investing is more tailored and can span several sectors or even asset classes (although some might still use a sector investment for their thematic exposure). To illustrate this, consider the growth trend for technology. While one way to incorporate this might be simply including a sector investment to information technology, a thematic investment might also consider companies outside of this sector classification which also stand to benefit by providing services associated with technology, such as Amazon or Netflix (part of the consumer discretionary sector).
IDENTIFYING THE ‘RIGHT’ THEMES AND TRENDS
Avoiding passing fads or themes that may only be short-lived is the key to identifying trends to invest in.
Themes should be:
- Universal rather than specific to just one company or region;
- Sustainable over longer periods, in some cases 20 years or more; and
- Based on known patterns and pressures.
Anything involving government activity, such as legislation or budget spend, is also valuable to consider as it provides regulated support for a theme to continue over long durations.
Some examples of themes include virtual connectivity, e-commerce, biotechnology, the growth of the middle-class in Asia and climate change.
VIRTUAL CONNECTIVITY AND DIGITISATION
Faster and cheaper internet access, along with the unexpected changes wrought by the COVID-19 pandemic, have seen the world increasingly move interactions and consumption online. It is estimated that nearly 60% of the world’s population are internet users who embrace social media, streaming services and online shopping. The internet is rapidly becoming an essential tool of modern life, required for business processes, data storage and even supporting lifestyle improvements via automated devices.
The current roll-out of the 5G network worldwide will further support this movement. It is predicted that around 500 billion devices will be connected to the internet by 2030.
Looking at current technology and use, a range of industries have been able to take advantage of the opportunities from this shift online.
Retailers and suppliers can access and service customers all over the world from one base location, which has cost savings in terms of bricks and mortar space as well as staff.
Companies that were slow to move online have suffered, with a number of traditional department stores prime examples of this. This has been a space ripe for disruption and the Amazons and Alibabas of the world have set the standard for expectations of e-commerce experiences. The race continues to offer even better experiences in terms of product and delivery.
Ways of incorporating this theme for clients include sector-focused investments, such as technology funds, sub-themes like robotics and artificial intelligence or even those that identify top innovative companies broadly.
Biotechnology has experienced extraordinary growth in recent times and come to popular attention as companies race to find vaccines and cures for COVID-19.
Biotechnology specifically refers to technologies that use biological processes, capturing companies that focus on research, development, manufacturing and/or marketing of products based on biological and genetic information. The different types of biotechnology include biological drugs, vaccines, immunotherapy, gene therapy, orphan drugs and genetic engineering.
Australian investors are typically exposed to the concentrated Australian biotechnology industry through market leaders such as CSL. However, Australians may be missing the broader and more diverse industry globally, particularly in the US, which is typically considered the centre of global biotechnology due to the world-renowned Food and Drug Administration (FDA) approval process and the large US consumption market.
Sector investments in healthcare may offer exposure to biotechnology, but there are also a range of investments available that specifically identify biotechnology companies, which may offer more targeted exposure across small to large capitalisation biotechnology companies.
THE GROWTH OF THE MIDDLE-CLASS IN ASIA
The growth of the middle class across Asia has been well documented for years. The OECD predicts that households with daily expenditures of $10 to $100 per person would swell to 4.9 billion by 2030, with two-thirds residing across Asia. The region is anticipated to be responsible for 52% of global gross domestic product (GDP) by 2050.
The movement of people to higher financial status represents a huge opportunity. It is an audience with the ability to afford more than just the basics and demand better quality.
The shift has also been responsible for the emergence of a number of global power players domiciled within the Asian region. Armed with local expertise to manage regulations and cultural differences and anticipate demand and needs, these companies have large and growing client bases and the ability to pivot to other regions. Chinese-based Alibaba and Indian multinational Infosys Ltd are good examples of these companies.
Investors interested in exposure to this theme could look at investments broadly focused on the region, those focused on individual countries like China or India, or sectors that may benefit from growth in this region.
Ongoing population growth and climate change are placing pressure on available resources including minerals, energy, water and food sources. For example, global energy consumption is anticipated to more than double in the next 30 years. This is driving a transition to renewable and more sustainable business and lifestyle.
Wind and solar energy are forecast to supply around 48% of world electricity needs by 2050, with battery technology, gas peakers (turbines or engines that burn natural gas) and dynamic demand anticipated to drive market penetration of solar and wind by more than 80% according to BloombergNEF. Battery technology is key to supporting the transition to renewable energy and its supply chain extends from mining companies producing metals like lithium, to manufacturers of battery storage and storage technology providers.
Growth in electric vehicle use is similarly likely to fuel demand for battery storage in the coming years. BloombergNEF predicts sales to rapidly increase from 2.7% of new cars sold representing 1.7 million cars in 2020, to over half of all passenger vehicles sold by 2040 representing 54 million cars.
Exposure to this space can come through clean energy focused investments – those that incorporate specific environmental filters or focus on specific supporting industries.
USING THEMATIC INVESTMENTS IN YOUR CLIENTS’ PORTFOLIOS
Financial advisers may consider a range of options for thematic investing such as direct shares, actively managed funds and exchange traded funds (ETFs). Individual companies associated with themes may not always be accessible, due to costs or lack of access to the stock exchanges they are listed on. ETFs tend to be the lowest cost and most accessible option for investment portfolios given the potential for exposure to many companies globally and given they usually cost less than actively managed options.
HOW TO ALLOCATE TO THEMATIC INVESTMENTS
Thematic investments are versatile and can be used in a range of ways, such as:
- To complement the equities component in the core of a portfolio;
- As a tactical tilt in the satellite portion of a portfolio towards trends or for growth; and/or
- As a diversification tool to broaden from typical assets in a portfolio core.
An example of how this might work in practice is one investor might choose a thematic investment as part of their international equities exposure to offer diversification and to complement more traditional equity exposures such as the S&P 500. Alternatively, a different investor may view it as a growth opportunity and use it as a satellite investment. The size of the allocation may vary depending on how the investor chooses to use it, ranging from 5% to 10% per investment depending on factors such as existing portfolio composition, risk tolerance, needs and goals.
Another illustration of how thematic investing can be incorporated is shown below:
- Thematic investments can be a valuable way of engaging clients with their investments. They allow active participation in the major forces driving human progress and can be an opportunity to incorporate passions within a portfolio.
- The increasing availability of tailored thematic investments in the market mean they are more accessible than ever, allowing financial advisers the ability to support their clients with suitable options according to their needs, goals and portfolios.
Kanish Chugh is head of distribution at ETF Securities.