For those that are interested in investing in a ‘thematic’ fund, or with a manager that adopts this style, it can be difficult to make a comparison and ensure the fund chosen is the best available.
As Frances Hudson, global thematic strategist at Standard Life Investments, points out there is no neat category for thematic investing.
“You could argue, I suppose, that anything that is a single-sector fund is thematic if it just looks at one particular theme. The same with a technology fund – it really is just how you slice it.”
However, she adds that with a thematic approach the manager perhaps needs a higher conviction in the theme to start with, “but from that point on it is portfolio construction as normal”.
Ben Willis, investment manager and head of research at Whitechurch Securities, agrees that it is difficult to compare thematic investing with each other or to alternative investment approaches.
“Performance relies on a number of factors. First and foremost is whether you have invested into the right themes. Also, performance relies heavily on the manager. Even if a manager has been successful in their thematic selection, their actual stock selection will still affect numbers – poor stock selection will hamper returns and undermine any successfully identified thematic trend.”
The point that thematic investing still needs good stock selection in the underlying portfolio is important to grasp.
Ben Seager-Scott, senior analyst at Bestinvest, explains: “This sort of top-down investment style is conceptually at the other end of the spectrum from pure bottom-up stock picking where the manager claims to pay little attention to the wider picture and just focuses on companies that are good in their own right.
“In reality there is a lot of overlap between the two ideas, and the main difference is the starting point – whether you start with a theme or a watch list of companies. After all, with top-down investing, the manager will still be doing stock picking to find good companies within each ‘theme’. On the flip side, a bottom-up stockpicker will often end up with ‘themes’ emerging in their portfolio where there are a lot of attractive companies deriving benefit from a broad theme – a good example of this is in the emerging markets, where a lot of bottom-up stockpickers tend to have a lot of exposure to the ‘theme’ of domestic consumption.
Charles Richardson, manager of the Veritas Global Equity Income fund, notes that themes essentially act as filters to help identify stock ideas, so investment results will ultimately depend on stock selection and the timing of these stock purchases.
He adds: “At Veritas, we understand the limitations of themes. Often a good theme is overvalued or not investable with sufficient quality of position. Themes are only one part of how we invest. The use of our own research [and] our own network of consultants all play a role.”
Meanwhile Jan Luthman, who co-manages the Liontrust Macro Equity Income fund with Stephen Bailey, points out that while themes evolve and fade over an extended period – often many years – it can take a long time for equity markets to recognise the emergence and evolution of themes.
He explains: “The relatively slow-moving nature of themes and their delayed incorporation into equity market valuations provides us with extended windows of opportunity in which to evaluate the implications and establish appropriate positions within our funds.”
As with most investment approaches the performance of thematic strategies depends on the skill and experience of the team behind it. Domestic consumption in emerging markets may be a key theme that could run for the next decade, but if the stocks in a portfolio are the wrong play then two comparable funds with the same theme could have very differing results.
Yet a thematic approach may well appeal to investors who value the story behind a theme rather than focus on factors such as stock valuations and margins. So, in some cases, having managers that can talk a thematic game, while at the same time having the experience of bottom-up stock selection, could be the best combination.
Veritas portfolio manager Charles Richardson summarises: “In a world with instant global telecommunication, sentiment and social attitudes can shift dramatically in a very short space of time and can have a powerful impact on a company’s business – both positive and negative. Yet it has been our experience that financial markets remain remarkably slow in recognising the implications of these new and emerging risks and incorporating them within equity valuations.”
Nyree Stewart is deputy features editor at Investment Adviser
LONG-TERMS THEMES
WHAT IS INFLUENCING THEMATIC PORTFOLIOS?
Investment Adviser asked thematic investors from Newton, Veritas, Liontrust and Sarasin what themes were running through their portfolios. Three answers came up:
Global debt
As developed economies continued to struggle to reduce debt burdens, thematic managers argued this was a theme that would continue to have an effect on stocks for many years to come.
Innovation
The rapid growth of social media and innovative technologies, such as cloud computing and mobile payments, has contributed to the innovation theme. Most have stayed away from the big-noise firms like Facebook, Google and LinkedIn, which were significantly overvalued and instead have looked behind the scenes at those companies supplying the mechanics that allow the innovation in the first place.
Demographics
The rise of emerging markets plays a significant role in this theme as younger generations in markets such as China and India become more affluent and cash rich. This theme has many strands to it, but the managers did agree that the rise of the consumer in the emerging markets is a long-term theme in their portfolios.
THE THEMATIC APPROACH
WHO DOES IT?
Newton Asset Management
Newton, in spite of having a large parent company, maintains its core thematic investment approach with an investment policy based on the conviction that no company, market, or economy can be considered in isolation; each must be understood in a global context.
Their current themes include a world characterised by less debt, a more balanced global economy, a higher cost of energy, an older population and a greater degree of connectivity.
It states: “We believe firmly that, in a rapidly shrinking world, investment prospects can only be evaluated properly by understanding events, trends and competitive pressures on a worldwide basis.
“We believe also that a geographically constrained approach limits a portfolio manager’s ability to harness investment opportunities. Our themes represent our convictions about the likely forces of change in the world. They are based upon observable and structural trends, rather than speculative or short-lived ideas. Our thematic framework develops over time, reflecting the emergence of new ideas and the culmination of old ones, as well as the evolution of existing themes.”
Neptune Investment Management
Neptune’s proprietary investment process is based on the philosophy that equities should be viewed at a global industry or sector level, rather than taking the more traditional regional, benchmark-driven approach.
It states this premise is built on the fact that global companies dominate the areas in which they operate, so there are often no more than a handful of companies in each area worth investing in. Once it has identified the global sectors with the best investment potential in any given economic climate, the company selects the strongest companies within those sectors, regardless of where they are based.
The firm says: “This combination of our top-down global sector overview and strong, bottom-up stock selection forms the rigorous and proven investment process that is used across all our funds. Our portfolios are not constrained by benchmarks, allowing us to pursue a high conviction approach to investment management.”
Sarasin & Partners
The London-based specialist investment management arm of Swiss private banking institution Bank Sarasin, states its investment philosophy uses traditional techniques of investment applied in a modern way with three clear principles, asset allocation, recurring income with a sustainable yield, and that equity investment is best approached on an increasingly global basis.
Portfolio managers look at big picture trends they believe will drive the revenue of companies over the next decade, then core themes for companies such as franchise power, before finally looking at valuations. They have recently evolved their themes to include aspects such as ‘disruption and innovation’
It states: “When investing globally we believe that there are powerful cross-border influences that have the ability to transcend country influences. Our Global Thematic Equities investment process adds an important new dimension to global equity investment by seeking to identify these cross-border influences and select those companies on that have superior business models, superior cash flow, clear pricing power, strong research and development and a sharp focus on delivering attractive returns to their shareholders.”
