- Rise of Thematic Investing: Profiting from Global Megatrends
- Limitations of Thematic Investing: Predicting the Unpredictable
- Dominant Megatrends Shaping the Future: Aging Populations and Transition to a Low-Carbon Economy
Thematic investing has been around for a while, but funds that profit from “global megatrends” have become more popular.
Thematic investment targets disruptions like artificial intelligence and electric transportation.
Due to the massive funding of this global catastrophe, sustainable and climate-related themes have garnered investor interest.
Numerous investors believe that these motifs have the potential to generate outsized future market returns.
As a consequence, some firms, such as Newton Investment Management and Pictet, have incorporated thematic investing into their core strategy.
In 2012, Charles Schwab launched themed stock lists for investors seeking firms that match their values and interests.
Jason Hollands, a director at Bestinvest, explains: ‘It’s all about identifying significant themes – sometimes referred to as megatrends – in society and the economy that will play out over the next few years, and then identifying companies that stand to benefit.’
You could be excused for wondering whether thematic investing is simply sector investing in disguise.
However, according to the investment firm BlackRock, thematic funds and sector funds are vastly distinct propositions.
A spokesperson for BlackRock explains, ‘Themes are centered on structural development or disruption and aim to capture a one-time shift that will have a lasting effect on the current economic environment.
Sectors are cyclical, and short- to medium-term business cycle perspectives often impact investment allocations.
Theme investing focuses on innovative enterprises that will dominate global equity markets.
Hollands adds, “When you adopt a thematic mindset, the process of investing can be quite exciting because, rather than focusing solely on the nuts and bolts of profits, valuations, and dividends, you are considering the really big picture stuff.”
What limitations does thematic investing have?
Thematic investing is like looking into a crystal ball to anticipate the future.
However, the future is uncertain and does not always follow expectations.
According to Hollands, the end of the Cold War was expected to bring peace and globalisation seemed unstoppable.
Russia is currently engaged in a conflict in Europe, relations between the West and China are deteriorating, and the zenith of globalization has passed, necessitating greater supply chain security.
Some investment themes may also prove to be trends that fade away.
“The theme may not play out as desired,” says Morningstar senior analyst Kenneth Lamont.
‘There are topics, such as 3D printing, that may alter our lives in the future but have not manifested as profoundly as we might have anticipated. If we had believed all the headlines, we would have expected to be printing our own McDonald’s patties by now.
Once a concept becomes popular, investors flock to it, as with AI.
Hollands warns: ‘This can sometimes make thematic investors vulnerable to investment bubbles. Where exuberance about the theme propels valuations to extreme levels, eventually leading to a burst. This is not always the case, but it is something to consider.
When it comes to thematic investing, investors should also be wary of “them washing.”
In some instances, thematic funds are dominated by large tech companies with limited exposure to multiple themes.
This raises very real concerns about them washing, according to Lamont, who advises investors not to be swayed by a fund’s narrative but rather to evaluate whether the fund provides adequate exposure to the desired theme.
What megatrends’ are likely to dominate the future?
Investors identify megatrends as the themes that are most likely to drive global change.
Ageing populations and increasing populations require resource efficiency.
‘For instance, in Japan, the median age is 48.6 years old and the population is declining, with China expected to follow suit as a result of its calamitous former “one child” per family policy.
‘Countries with aging populations confront economic challenges, but investment opportunities include demand for healthcare, greater use of automation to address labor shortages, and increased demand for leisure services to meet the needs of a growing retiree population.’
Another megatrend is the transition to a low-carbon economy and away from fossil fuels. Copper, nickel, lithium, cobalt, graphite, and rare earth metals are in high demand for renewable energy infrastructure and electric vehicles as a result of the transition to ‘Net Zero’ carbon emissions.
