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Investing in the future, not the past

09th June, 2020

In an era of low interest rates, increased market volatility, a rise in protectionist policies, disruptive technology and being cognisant of the market cycles, many investors have started to question traditional approaches to allocating capital and managing portfolios.

The standard approach to portfolio management, which utilises benchmarks, can be relatively focused on past performance. As a consequence, a growing number of investors are turning to more dynamic ‘thematic’ investing strategies which are forward-looking in nature and aim to profit from prevailing global long-term trends. Who doesn’t want to invest in the future?

What is thematic investing?

Essentially, thematic investing is a top-down investment approach that allows investors to gain exposure to macroeconomic themes and trends in order to get a slice of the ‘disruption pie’, which is typically implemented through managed funds or direct equities. These provide diversification and an opportunity to invest in areas that will shape the world of tomorrow, removing the concentration on benchmarks and focusing on harnessing the ideas that will form the future. The traditional approach to investing usually revolves around following or, deviating from, a benchmark to increase returns or mitigate risk. The issue with this approach lies in the assumption that past success will continue to provide future success. This is evident in the large weightings to large-cap companies in most portfolios. In contrast, thematic investing aims to capture the upside of disruptive growth opportunities by investing in forward-looking companies.

In an increasingly dynamic and connected world, the power of disruptive innovations and technologies to shift the world in a short space of time is not to be underestimated. Davy’s thematic platform complements the traditional multi-asset portfolios when adopted in conjunction with a satellite investment. The trends in focus aim to address both threats and opportunities which are of global concern.

Themes under the spotlight

Socially Responsible Investing (SRI) is undisputedly on the rise as consumers demand products and services that are sustainable. Recently, the much-publicised teenage activist Greta Thunberg proclaimed “We are in the beginning of a mass extinction”, which opened ears globally. Big businesses are taking note.  Amazon has pledged to be carbon neutral by 2040 and has since ordered 100,000 electric delivery vehicles, while Google made the biggest corporate purchase of renewable energy at $2 billion. This is an investment trend that can be executed across the multi-asset portfolio level or as a selective additional investment. The impact of Climate Change is evident in the media on a daily basis and as a result, climate conscious companies are in focus. The prevalence of climate disruption will create difficulties for some business models and opportunities for others as the climate change theme aims to participate in the upside of this movement.

There is a spread of power back to the east, hence China is presenting an attractive investment opportunity. A population of 1.4 billion speaks for itself, coupled with the Chinese consumer and investor becoming more sophisticated makes for a compelling investment case. On a valuation basis, equities in China represent a significant discount to US and we expect this to narrow over time. The coronavirus has further provided an attractive entry point for investors as we feel the pullback in markets will not last forever. 

The Healthcare sector is a long-term investment play as life expectancy increases, an ageing demographic, a growing global middle class and a rise in the prevalence of diseases will drive the industry into the future. Fuelled largely by changes in demographics, a new paradigm of public and private sector collaboration is developing to transform the financing and delivery of healthcare.

In a world with increasing connectivity and where data has been described as the ‘new gold’, the emphasis on controlling threats through Cybersecurity is growing at a rapid pace. Cybersecurity is a key concern for governments, board rooms and households. The demand for Cybersecurity is increasing as the complexity of IT systems advances and attackers become more sophisticated.

The advancements of Artificial Intelligence and Robotics based technology have been referred to as the ‘next industrial revolution’. These are driving the next wave of innovation that will provide solutions to global issues including low productivity, population growth and global warming.

Pros and cons

The main benefit is grounded in the opportunity for capital growth. The intuitive nature of thematic investing makes it accessible for one to invest in themes you believe will shape the world of tomorrow. The long-term focus of thematic investing aims to reward those investors who can sustain some short-term market volatility. It provides diversification as the investments have lower correlations to standard equity benchmarks.

As with any investment, there are always downside risks.  Investors can be unfortunate and invest in a sector that does not perform as anticipated. There can be periods when these investments may under-perform the global equity markets. Therefore, thematic investments are not suitable for investors who cannot tolerate deviations from global equity benchmarks.

Making the future a reality

Investing led by a goals-based financial plan is at the core of our investment philosophy. If you are interested in incorporating an exposure to thematic investments, perhaps alongside your multi-asset portfolio, why not contact us today to start the conversation. Thematic investing enables you to utilise your own expertise and experience to tailor your investments that can be both rewarding and responsible.

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