Back to the future — a history of thematic equity at Pictet Asset Management

In the mid-1990s, while working for another asset management company early in my investment career, I was given the responsibility of managing the global equity segment of a pension fund. Until then I had only run single country portfolios, so it was an exciting opportunity for me.

Among the stocks I inherited was a new technology hardware manufacturer. It was increasing sales rapidly, but I couldn’t really understand the business fundamentals or its long-term appeal. After some months of strong share price performance, I decided to take profits on the stock and sold it.

That, unfortunately, proved a little premature (to say the least). In the following five years, the company’s share price continued on a stratospheric path. While falling heavily in the dot-com bust, it ultimately emerged on the other side to become a mainstay in global equity indices. Today, the firm boasts a market capitalisation of USD200 billion and employs over 70,000 people. The stock I unwisely sold was Cisco Systems, a behemoth of the Internet age.

From this experience I learnt that when it comes to investing in global equities, it pays to become a specialist. Being a portfolio manager that takes recommendations from a pool of sector analysts can lead to poor decisions. By accumulating expertise in a specific sector, however, investment managers are, I believe, better positioned to deliver clients repeatable outperformance over the long term.

“When it comes to investing in global equities, it pays to become a specialist.”

I also learnt that the world was changing faster than ever and that being on the wrong side of change could have massive repercussions for investment portfolios. More specifically, I discovered that I should view the world through the prism of 'megatrends' - the technological, environmental and societal forces of change that were giving rise to compelling investment opportunities in specific industries. In the case of Cisco, I failed to appreciate the pace of technological development and the rapid evolution of the network economy.

It is by applying these two lessons consistently over more than two decades that I and my colleagues at Pictet Asset Management have been able to build unrivalled expertise in thematic equities. We now manage over USD 40 billion in equity assets across a range of single-theme and multiple-theme strategies, each one designed to take advantage of the long-term trends transforming the economic landscape.

The firms we invest in our thematic portfolios have several distinguishing features. First, thematic companies operate in the most dynamic areas of the economy – sectors whose prospects are being transformed by megatrends.

Second, they are specialists. We concentrate investments in specialist companies whose revenue growth is tied to the evolution of a particular theme, which we measure with our proprietary gauge of thematic “purity”. This is because we are mindful of avoiding the ‘conglomerate discount’ – a valuation penalty that’s applied to larger, more complicated businesses.

Third, the companies we invest in have underappreciated cash generation capabilities. Our research shows that the market persistently overestimates how quickly the cash flow of these companies fades: an anomaly that we aim to exploit.

Our ability to identify such distinctive investments stems from our own specialist expertise. Our investment managers are specialists in the themes they manage. They are definitely not generalists but very focused investors. We like to say they “know a lot about little”, combining the role of both analyst and portfolio manager.

Teamwork is crucial, so we ensure each portfolios is overseen by at least two investment managers. A rigorous investment process is essential too. A commonly agreed process provides the arena for clear debate and sound decision making.

What also sets our thematic equity franchise apart is our use of external experts - or Advisory Boards - for each of our single-theme strategies to help us track and manage the evolution of investment themes.

These boards do not dictate the construction of portfolios; rather, they help our investment managers track and assess the long-term course of the theme. We also work with the Copenhagen Institute for Future Studies (CIFS) whose megatrend framework we use as a ‘lens’ through which to analyse the evolution of our investment universe.

Over the past several years, we have developed a multiple-theme strategy that we believe can fit in the active equity allocation of global portfolios: Pictet Global Thematic Opportunities (GTO). Available in Canada through Manulife Global Thematic Opportunities Fund, you can find out more about the fund at manulifeim.ca/gto.

“Our entire thematic process is built on identifying the Ciscos of the future.”

The strategy is benchmark agnostic and genuinely active, with a high active share and high conviction in its approach. Tracking its performance versus a market index in the shorter term is a bit limiting, but in the long term it should benefit from not having to cleave to a backward-looking index of past winners.

Our entire thematic process is built on identifying the Ciscos of the future, and we remain confident that our approach leaves us well placed to outperform the main global equity indices over the long term.