How thematic investments can help future proof your portfolio

This article was featured in Wealth Professional.

Thematic investing is an exciting frontier, for some, it features the biggest trends and futuristic thinking humanity can muster. From space to crypto to robotics, investors are eager to put their money in the future. According to 2021 Morningstar data, as of August, the global thematic fund market has soared to $595 billion.

Gertjan van der Geer is a Senior Investment Manager on the Thematic Equities Team at Pictet Asset Management, subadvisor for the Manulife Global Thematic Opportunities Fund and Class, and he told Wealth Professional how the thematic approach is turning traditional backward-looking equity investing on its head.

He said: “Now you want to predict where the MSCI World Index will be in 20 or 30 years and make sure you participate. We want to form an opinion on what parts of the market will benefit from the changes that are coming and position the portfolio to benefit from that as much as possible. Thematic investing is about seeking ways to future-proof your portfolio.”

The more conservative investor may instinctively deem this too risky, but Van der Geer stressed that looking only to the past gives people a false sense of security – and also means you invest in companies that will fade over time. The biggest risk, however, is being seduced by short-term trends that lose steam and popularity after initial burst of hype. Anyone remember Heelys, for example?

If done correctly, thematics have to be longer term in nature. Van der Geer’s research process, therefore, is geared towards identifying, through a mega-trend lens, those true opportunities that he thinks will lead to faster growth than the rest of the market. To do this effectively, a solid valuation framework safeguards you from overpaying for flavour-of-the-month stocks and from being lured by short-term noise and parabolic moves in the market.

He said: “That’s not the game that we want to play. I don't have to be the top performer on a one-year basis; I want to be the top performer on a 10-year basis. We have a much greater chance of doing that if we stick to identifying companies that have a true competitive advantage within their segment of the market, which is benefiting from multiple megatrend-based tailwinds. Within the market, they're taking market share, which gives them attractive operational leverage potential as well.

“The ideal combination would be if the market does not fully discount that long-term growth potential in the share price - that's our ideal combination.”

Pictet uses a framework developed by the Copenhagen Institute for Futures Studies, a think tank that's been researching megatrends for more than 50 years. A megatrend is a truly seismic shift, like sustainability, globalization (global connectedness and flow of people, capital, information, technology), and health (aging population and technology advances) to name just three. The fund focuses on 14 megatrends transforming our world and its active management ensures investors capture this by reacting to changes as well as understanding how this affects the stock market.

Low-cost thematic ETFs may have flooded the space but, in contrast, they tend to be more narrowly defined. Van der Geer explained that means the risk of overpaying is greater. “The way we define our themes is broader. We're not investing in a theme fund called 3D, for example, it has to be broader in nature, because it needs to represent [a bigger shift] in the way that we interact. That gives us more longevity. The biggest risk of thematic ETFs passively managed is that they have a lifespan that can turn out to be quite short if they're too narrowly defined.”

Each idea or theme can come from any number of sources – fund managers, product developers, word on the street – but it has to tick various boxes before Pictet launches it, otherwise it’s parked for reanalysis at a later date. It must have an investable universe that includes 100 to 250 names and should include stocks not captured in an MSCI sector. Pictet doesn’t want to run sector funds – it strives to be a leader in thematic investing. To do this, it also needs to find the right managers.

For example, robotics was an area Pictet had “in its drawer” for a couple of years before launching the theme in 2015 because the investment universe wasn't large enough. More recently, Pictet developed a new thematic opportunity but only once it felt it had found the right people, and it had a wide enough universe, it launched a theme called “Human”. The theory behind this was borne out of Maslow’s pyramid of needs. Van der Geer explained: “Society has most of that pyramid pretty well covered, except for the top, the self actualization [part of the pyramid]. It’s basically the service side of self actualization; life care, and play. It’s really about entertainment, it's about caring, it's about continued education.

“One of our fund managers identified that opportunity, started working on developing that universe, and when that was wide enough and deemed attractive enough for our clients, we launched it [for European investors] late last year.”

One area that was recently shelved was space, an area that is a hot topic and has seen a number of ETF launches. Van der Geer and his team concluded, however, that it’s just way too early for them and that space resembles simply a basket of stocks. It didn’t chime with Pictet’s bottom-up approach, unlike Robotics and the “Human” theme, which really ticked all the boxes of having a competitive advantage in a segment of the market with structural tailwinds.

This theme is just one component available to the Manulife Global Thematic Opportunities Fund, which gives it a huge diversification advantage.

Van der Geer added: “Therefore, it goes from being a satellite to being core in your asset allocation. Because of the diversity of the thematic funds we have, we can effectively compete with global equity; it takes you out of the niche, right into mainstream. The investor doesn’t want an active manager to be close to the index – they want him to think completely differently. By having a future oriented portfolio, with a multi thematic approach, that’s exactly what you get.”