It was Albert Einstein that said “we shall require a substantially new manner of thinking if mankind is to survive”.
There are a number of themes that can be obviously identified at the moment, the majority of which have the potential to run through a portfolio for years to come.
Innovation, for example, has been a big theme for investors for some time, with a number of fund managers citing information technology companies as new sources of growth.
Simon Laing, US equities fund manager at Invesco Perpetual, explains: “There are shifts to big data, and we could spend a lot of time discussing that, but it generally means we are now getting data from Twitter and Facebook.
“We need to analyse that, which requires significantly more computing power than we ever had before.”
He adds: “There is the shift to mobility, which is well through that adoption curve – we are seeing it with iPads, etc. Then there is the shift to the cloud computing arena, which is effectively organisations outsourcing their IT.”
Newton Investment Management, a firm known for its thematic approach, identifies ‘state intervention’, ‘debt burden’ and ‘energy and infrastructure’ as viable long-term themes that are running through its portfolios at the moment.
But identifying long-term themes from what can turn out to be short-term fads can be difficult, particularly in the increasingly fast-paced environment of today’s globalised world.
“It is natural to think of thematic investing as an attempt to capitalise on a fashion or fad, rather than rooted in rigorous fundamental research,” says Jan Ehrhardt, a portfolio manager at DJE Kapital.
“Finding a theme that can act as a sustainable and durable guide yet does not constrict the manager to an obscure niche or a fad that becomes a tomb is not easy. Indeed, it is the major drawback to thematic investing.”
Mr Ehrhardt offers ‘demographics’, particularly the growth of the young consumer, as a long-term investment theme, suggesting “the purchasing behaviour of the 19-35 age groups is a key leading indicator for many successful products and services”.
He adds: “The largest companies on most stockmarkets are global entities with exposure to a wide range of markets and currencies. It is worth noting that the consumer in emerging markets is playing an ever-more decisive role in the future earnings growth potential of global companies.
“Interestingly, in these countries, it is often the young adult market segment that has the highest monthly income. In China, the highest monthly income is in the segment of the population aged between 19 and 29.”
The rise of emerging markets plays a part in a number of themes – changing demographics, infrastructure and innovation, to name just a handful.
At the start of 2013, Tom Becket, Psigma Investment Management’s chief investment officer, highlighted ‘the exciting growth of emerging markets’ as one of his themes for the year.
Investing in funds such as Findlay Park Latin America and Prusik Asian Income, Mr Becket has focused on ‘burgeoning emerging market consumption’, and a holding in First State Agribusiness provides exposure to an area of the market that, according to the manager, is “set to benefit from the supply-and-demand imbalances created by a growing population and a myriad of hydration issues”.
From an outsider’s perspective, thematic investing may appear simplistic – an easy way to benefit from growing areas of the market. Those with this mindset would do well to remember that, if something looks to good to be true, it probably is. Separating the fads from the true themes is difficult, and even a professional investor can get it wrong.
“Themes can be short-lived,” says Mr Ehrhardt. “We recognise that some investment managers base their global investment strategies on thematic approaches to stock selection, but have a continuous re-evaluation of existing themes, replacing those seen as no longer relevant with new ones. It can be effective, but a multi-themed, continuously changing framework for stock selection can also be a recipe for anarchy, with no real long-term expertise developed by the managers.”
Jenny Lowe is features editor at Investment Adviser
