EquitiesMay 20 2013

What is thematic investing?

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Thematic investing is a broad term that is widely used, particularly within equity investing, but its meaning can differ depending on the audience.

In general, it is considered to mean a top-down investment approach with a focus on broader, macroeconomic themes that a fund manager can use to identify strong companies.

Frances Hudson, strategist for multi-asset investing at Standard Life Investments, says: “It tends to be global [and] it can be multi-asset, although within wealth management it is primarily equities. The manager will pick things they think are important, so it might be the emergence of emerging markets, something changing about technology, or an aspect of the environment, such as water shortages.

“They have to be able to populate the themes with things they can invest in. That is sometimes where there is a missing link, as you can have quite strong ideas about what is going on in terms of the environment, but if you try and screen through all the companies out there, finding something that captures the ideas and is of sufficient quality, liquidity and everything else is sometimes quite difficult.”

Thematic investing can be captured in the investment philosophy of one fund or a range of strategies, or it can be a house style as adopted by companies such as Neptune, Newton and Veritas.

Charles Richardson, manager of the Veritas Global Equity Income fund, notes that 20 years ago the term ‘themes’ was “not part of the accepted lexicon of the asset management business”.

He says: “At that time, typically, many prospective clients or their advisers wanted to know about the four Ps (philosophy, people, process and performance) and they expected some peg to hang you on – value, growth, regional focus and so on.

“Today, ‘thematic’ appears everywhere. Like all strategies, it needs definition, and the key is successful implementation. For our part, the use of themes was borne out of a desire to capture certain benefits of an investment approach, as well as to escape from some ‘conventional wisdom’ that was highly questionable.”

According to Mr Richardson, the benefits include the formulation of strategic context, getting behind future tailwinds, narrowing the universe, and focusing further research while avoiding spot forecasting or market timing.

That said, he warns that themes don’t pick stocks. “You cannot shoehorn a complex company and its valuation into a theme,” he says. “Don’t even try, and don’t believe those who rely too heavily on themes. Themes encourage momentum investing and do not value a company’s equity, nor do they define quality.”

Ben Willis, investment manager and head of research at Whitechurch Securities, points out a number of well-known thematic trends have become commonplace over the years, including developing and emerging market wealth creation, clean energy, natural resource scarcity, climate change and disruptive technology.

Darius McDermott, managing director of Chelsea Financial Services, suggests thematic investing grew after the technology bubble burst at the beginning of the century, although some companies had been investing in this way for some time.

“Some companies have thematic investing at their core, others have a range of thematic funds, and others have standalone thematic funds. Henderson has a range of funds which have sustainability, environment and social themes at their core; Pictet has nine megatrends within its Global Megatrend Selection fund; and Fidelity and JPMorgan have launched specialist funds based on the global consumer, but generally don’t have thematics as the core for most of their fund range.”

Jan Luthman, co-manager of the Liontrust Macro Equity Income fund with Stephen Bailey, says a belief that macro-thematic analysis offers scope to add long-term investment value is at the core of his investment philosophy.

He adds: “Today’s macro themes are both unprecedented and powerful. Major themes such as globalisation, population ageing and environmental change have significant implications for economies and businesses. Structuring a portfolio so it fits with the forces that are reshaping national and international economies allows it to ‘sail with the wind’; ignoring or misinterpreting these themes can condemn a fund to perpetually sailing against unseen and misunderstood tides.”

As a way of investing, themes – like all approaches – has its ups and downs, but it can be beneficial for a long-term investor, with some themes looking to reach maturity up to 20 years in the future.

Mr McDermott says: “I think having themes as part of the investment process is a good idea, particularly for the longer term, which is what investing is supposed to be. I wouldn’t expect key themes to come good in one or two years – they are areas that will develop over multiple years. Therefore, anyone investing in this idea should be prepared for the long haul.”