Thematic investing: what it is and how to get involved

0
Written by:
03/12/2015
Climate change, ageing populations and food shortages are three macro trends shaping our world. They are also three themes investors can profit from if they invest in the right companies at the right time.

Take the example of food demand soaring thanks to population growth, rising affluence and changing diets. To play this theme, putting money into seed companies, fertiliser businesses or equipment manufacturers could be lucrative.

This is known as thematic or trend investing – a way of profiting from long-term shifts, whether they are structural, economic or social.

One of the main benefits of the approach is it forces investors to focus on the bigger picture and ignore the noise of short-term events such as interest rate rises or turbulence in emerging markets.

This certainly isn’t the approach for investors with short time horizons. Some of these themes will take decades to play out.

There are two stages to thematic investing.

It typically starts with identifying broad, macroeconomic, technological, environmental or social themes and moves on to finding suitable high-quality shares that fit with those pictures.

Tom Stevenson, investment director for personal investing at Fidelity International, says both stages are equally important.

“Without regard for the second stage and by just focusing on the top-down thematic approach, investors can simply end up trend-chasing, which could result in costly mistakes.”

This is what happened during the dotcom bubble in the late 1990s.

While the market was right about the theme, a lack of discipline when it came to valuation of shares undermined the story and the returns.

“Everyone was buying, regardless of how expensive things got,” says Stevenson.

Trends can also go out of favour and be prone to faddishness.

“In 2007 a raft of climate change related funds were launched to capitalise on this theme, some of which have subsequently closed as performance disappointed and investor appetite waned,” says Jason Hollands of Tilney Bestinvest.

Funds

If individual stock picking isn’t for you, there a few different of ways of investing in themes through funds. Some strategies are incredibly niche, focusing on one specific theme.

A few examples include: Pictet, which has funds focused on robotics, water and agriculture and clean energy; Sarasin and Partners, which has the Food & Agriculture Opportunities fund; and the iShares Global Water Ucits ETF.

Then there are funds focusing on a number of different themes such as Pictet-Global Megatrend Selection, which combines eight ideas including timber and water, clean energy and digital communication.

Or Sarasin EquiSar Global Thematic, which has five core corporate themes including disruption and innovation and franchise power.

Some fund groups apply a thematic approach to all their regional and global funds. Newton Investment Management, for example, has a 30 year history of thematic investing.

It recently added two new themes to its approach:

‘Abundance’ is based on the belief that a range of factors are preventing business rationalisation, bringing new modes of competition and price transparency to wide parts of the economy, and ultimately contributing to an abundance of goods and services.

And ‘Mind the gaps’ focuses on the enduring weakness of global growth, which is creating greater differences between countries, industries and companies.

The theme is based upon a belief that in a challenging (and more policy-limited) global environment, structural differences are likely to be of greater significance in determining investment returns.

It suggests a highly cautious approach to companies with poor governance, under-investment in technology or excessive borrowing.

Darius McDermott, managing director of Chelsea Financial Services, tips Newton’s Global Income and Emerging Markets funds.

 

 

Related Posts

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Flight cancelled or delayed? Your rights explained

With no sign of the problems in UK aviation easing over the peak summer period, many will worry whether holida...

Rail strikes: Your travel and refund rights

Thousands of railway workers will strike across three days this week, grinding much of the transport system to...

How your monthly bills could rise as the base rate reaches 1.25%

The Bank of England has raised the base rate to 1.25% as predicted – the fifth consecutive rise in just six ...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

DIY investors: 10 common mistakes to avoid

For those without the help and experience of an adviser, here are 10 common DIY investor mistakes to avoid.

Mortgage down-valuations: Tips to avoid pulling out of a house sale

Down-valuations are on the rise. So, what does it mean for home buyers, and what can you do?

Five tips for surviving a bear market mauling

The S&P 500 has slipped into bear market territory and for UK investors, the FTSE 250 is also on the edge. Her...

Money Tips of the Week