Thematic investing believes in the future
There’s an element of the investment management business that’ll always be preoccupied with trying to predict the future. After all, what business wouldn’t want to know which market opportunities will outperform others or which strategy versus another will be more likely to boost future earnings? But while they try, everyone generally admits there’s no foolproof way to know what’s going to happen tomorrow or the next day. But this doesn’t mean you can’t still attempt to predict the future — and that’s precisely what some institutions are determined to do.
Gaining insight about what the future may hold and the financial benefits that could come with it takes more than hope and guessing. There’s no advantage in that. The hints lie in pools of research and data that reveal where money is moving in anticipation of the next big thing. This is the focus of the Copenhagen Institute of Future Studies (CIFS) and their study of megatrends.
What is a megatrend?
The CIFS describes megatrends as long-term, influential trends on a global scale. They’re powerful social, demographic, environmental, and technological trends that can change the way countries are governed, how companies are run, and how people live their lives. Much of what the CIFS does through their constant analysis of trends, developments, and disruptions is closely connected to globalization, itself a megatrend.
Roughly 30 years ago, tariffs and trade barriers began to crumble alongside major shifts in the geopolitical landscape. National governments began signing multilateral trade agreements, sought more efficient supply chain planning, and tapped into the output of massive labour forces throughout the world, while China entered an unprecedented era of industrial expansion. With these pieces in place, financial markets set forward on a 20-year climb and globalization became the definitive movement that created the global economy we recognize today.
But in recent years, arguing over trade pacts and environmental standards, along with entrenched political division, has raised questions about our reliance on globalization as it currently exists. The unexpected onset of the coronavirus pandemic is the latest disruption with the potential to trigger a reversal towards de-globalization. Combined with a weakening economic forecasts, severely reduced international travel and consumer spending, and increasing demand for the domestic production of goods, it could mean the process is already well underway.
An example of this can be seen with medical and healthcare equipment, which, before the pandemic, was being produced in relatively few countries. North America was caught flat-footed on discovering that a significant amount of the personal protective equipment (PPE) for hospital staff and ventilators for severely infected patients was produced in distant lands, and therefore was dependent on costly international shipping and worrying resupply times. Faced with dangerous shortages, governments at every level appealed to local industries to respond to the crisis by retooling their facilities and to begin making some of the most critical equipment linked to surviving the virus.
Are such equipment shortages an example of globalization failure? It’s difficult to make that assertion considering the unexpected speed and scale of the crisis, but it does indicate that the global economic system can expect some degree of change, as the pandemic has clearly exposed some of its shortcomings. Amid the global effort to defeat COVID-19, it remains to be seen when and where the most damaging effects to the global economy may yet occur.
A nearshoring resurgence
International travel has been one of the most severely affected sectors throughout the pandemic. One could assume that the longer it continues, fewer business trips will be taken to check on multinational operations. It’s possible that this will spark more thought towards bringing businesses closer to their place of origin or to where the bulk of a company’s operations are based.
This is what Switzerland-based Pictet Asset Management refers to as nearshoring, the enhanced regionalization of the supply chain. It’s a practice that could see a resurgence if it makes economic sense for companies to relocate or expand more of their operations closer to their main market territories. This would allow more visits to the manufacturing site, eliminate the communication barriers imposed by time zones, and possibly increase the speed of bringing products to key markets.
“The global pandemic experience has illuminated the importance of globalization as an economic necessity, but perhaps not entirely in a traditional sense,” said Philip Petursson, Manulife Investment Management’s Chief Investment Strategist, during a recent episode of the Investments Unplugged podcast. “There are several examples that suggest it’s smarter for businesses to be able to continue operating when large-scale events interrupt their otherwise normal means of production.”
“Schneider Electric is a good example of the benefits of nearshoring. They’re one of the biggest electronic equipment suppliers in the world, but because they’re geographically diversified, they’re not overly dependent on any particular component being built and shipped from a single location. They’ve set themselves up to operate regionally, which lowers their risk of exposure to disruptive regional events, including trade disputes, natural disasters, or complete shutdowns of one area of the economy or another.”
The ability for some enterprises to function without pause during the pandemic is additional proof that current industrial automation and digital communication capabilities can easily support nearshoring as a sustainable alternative to relocating workforces and being overly reliant on “business-as-usual” conditions.
Pictet’s core interests specialize in thematic investing, which means they are drawn to forward-looking companies that pin their success on their connection to megatrends that shape our world. Thematic investment opportunities often exist in small to mid-sized businesses that operate within the world’s most dynamic industries. Although these companies wouldn’t stand out today as globally recognized brands, many have the potential to reach that status and eventually sit among the world’s top indexed companies. In fact, one study discovered that half the companies that appear in today’s S&P 500 Index won’t be on the list within the next decade.¹ Determining which specific companies will take their place is what thematic opportunities portfolio managers are most consumed with knowing.
“We have a deep appreciation of the Pictet team and the fundamental characteristics of the companies they invest in,” says Philip. “Their team only invests in companies that carry less risk, and can prove they’ll be profitable over time, versus those that can’t.”
Macan Nia, Senior Investment Strategist at Manulife Investment Management, agrees: “Pictet’s been doing this type of investing for 24 years. They’ve been through multiple cycles of economic upswings and downturns and have the experience to stay successful. This is what’s made them one of the top 50 asset managers in the world — and we’re delighted to partner with them on the Manulife Global Thematic Opportunities Fund.”
In the world of thematic investing, the future is a decade or two away but appeals today to the interests of long-term investors who have an eye on megatrends that will have an increasing impact on the world — and by that factor, their portfolios — regardless of how gradual it could be.
1 Scott D. Anthony, S. Patrick Viguerie, and Andrew Waldeck. Corporate Longevity: Turbulence Ahead for Large Organizations. Innosight Executive Briefing, Spring 2016. www.innosight.com/wp-content/uploads/2016/08/Corporate-Longevity-2016-Final.pdf.
Based on Investments Unplugged podcast episode 37, featuring Philip Petursson and members of Manulife Investment Management’s Capital Markets Strategy team. As always, investors should seek professional advice for their particular situation.
A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.
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