Future shock: the past is becoming unreliable

How do you invest when the past is no longer a reliable guide to the future?

Our global, hyper-connected society is increasingly unlike any that has come before. Thanks to exponential growth in computational power and communications networks, we have created an interconnected, complex and fast-paced world.

In the process, we have also created a far wider range of potential futures for ourselves. In fact, it is now much less likely that the future will closely resemble the past, and more likely that disruptive forces will have a major impact.

So how do you invest when the past is no longer a reliable guide to the future? We believe this question presents a key challenge to traditional investment approaches that – whether they focus on ‘value’, ‘growth’ or ‘quality’ – rely on historic data and the implicit assumption that the future will resemble the past.

Increasing uncertainty is undermining the relevance of historic data and the predictive power of backward-looking analysis. Over time, this is likely to become the Achilles heel of many active managers.

Have you got the right time?

One response to an uncertain future is to focus on short-term investments. These offer the allure of high returns if you can, for example, predict the next recession or shift in interest rates. But gaining even a small edge in this intensely competitive arena is hard. Market participants such as algorithmic traders and hedge funds often use significant leverage and high turnover rates to deliver merely adequate returns.

We do not believe this is appropriate for long-term investors, given the potential damage to returns when such investment decisions turn sour.

A second possible response is to abandon any attempt to predict the future and place your faith in ‘immutable laws of investment’, such as a conviction that markets are efficient allocators of capital over the long run. Investing along these lines may bring rewards, if investors are sufficiently patient: even a stopped clock is right twice a day. However, the exceedingly generous time horizon demanded is impractical for most, and virtually liberates investment managers from any accountability to their clients.

We believe the sweet spot for active investment lies between five and ten years. This is beyond the scope of most market participants and so is rife with opportunities for good research to be rewarded. At the same time, it is short enough to keep us honest and accountable for delivering meaningful investment returns.

This time horizon naturally orients us towards a thematic approach, focusing on durable themes that drive markets over this period [see the box for more]. These are significant trends born out of fundamental changes in societies and economies. They therefore have deeper underpinnings than the cyclical yo-yo of growth, inflation and interest rates and are likely to remain relevant throughout our investment period.

Disruption creates investment opportunity

Many of the investment opportunities that we believe will come to fruition in the next 5-10 years are available because investors are poorly equipped to deal with complexity and disruption.

Deeply human behavioural biases predispose us to anchor on irrelevant facts (such as the price paid for a security), to seek confirmation from the herd and to under-react to important new information. These biases have always driven opportunities for active managers. We believe they will continue to do so because investment decisions are ultimately made by humans, or human-designed algorithms.

Given the significant challenges of climate change, for example, our most damaging bias may be the belief that the future will largely resemble the past. This misconception is due in part to a dearth of data relating to key issues such as the potential impact of climate change and the transition to a lower-carbon economy, creating significant mis-pricings in investment markets.

Avoid fighting the last war

This environment favours investors who can deploy a forward-looking investment approach that benefits from complexity and disruption, while also regularly challenging the reasons for holding specific investments.

Such a strategy needs a disciplined security selection process that avoids the tendency to read too much into short-term trends or overpay for future growth. Deep fundamental research and careful stock selection are required to ensure portfolios contain under-appreciated thematic growth drivers.

It also asks for new ways of assessing a company’s prospects, such as Sarasin’ Climate Value at Risk (CVaR) analysis. This assesses the financial risks that climate change poses to specific businesses. The results can be startling, highlighting the extent to which the value of companies and entire industries could change in a net zero world.

Comfortable with being uncomfortable

A lot has happened has happened since we launched our first 40-stock multi-theme portfolio in 1994. We experienced the technology boom in 1999, its subsequent crash in 2002, the global financial crisis of 2007-’09, the European financial crisis of 2011-12 and the Covid pandemic.

Since 1 July 1994 this strategy, Sarasin Thematic Global Equity, has delivered an annualised growth rate (AGR) of 7.16%, compared to its sector AGR of 6.54%[1]. (Data at 31.10.2023)

Having a well-diversified multi-thematic approach can be highly beneficial for adjusting to even the most tumultuous market events. If there is a risk of overvaluation or a ‘bubble’ in one theme, our investment team can flexibly reduce exposure to it, unlike managers who specialise in one or a small clutch of themes.

The world is becoming more complex and the pace of change is accelerating, whether we look at technology, geopolitics, demographics or climate change. If you recognise, as we do, that the world is likely to be a radically different place in the decades ahead, a thoughtful, long-term thematic approach to investing has the potential to achieve attractive investment returns.

[1] Performance is provided net of fees. Past performance is not a guide to future returns and may not be repeated. Performance is calculated in GBP on the basis of net asset values (NAV) and dividends reinvested. Data as at 31.10.2023. Source: Sarasin & Partners LLP and FE FundInfo. Annualised Growth Rate (AGR) is the increase or decrease in value of an investment, expressed as a percentage per year. The benchmark of this fund has changed over time. Please visit  www.sarasinandpartners.com/docs/global/benchmarkhistory for a full history. Prior to 28th November 2016, the Fund was named Sarasin EquiSar Global Thematic Fund. Accumulation share class dividends are reinvested back into the fund and income share class dividends are paid out to investors.

Important Information

This document is intended for retail investors. You should not act or rely on this document but should contact your professional adviser.

This document has been issued by Sarasin & Partners LLP of Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, a limited liability partnership registered in England and Wales with registered number OC329859, and which is authorised and regulated by the Financial Conduct Authority with firm reference number 475111.

This document has been prepared for marketing and information purposes only and is not a solicitation, or an offer to buy or sell any security. The information on which the material is based has been obtained in good faith, from sources that we believe to be reliable, but we have not independently verified such information and we make no representation or warranty, express or implied, as to its accuracy. All expressions of opinion are subject to change without notice.

This document should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this material when taking individual investment and/or strategic decisions.

The value of investments and any income derived from them can fall as well as rise and investors may not get back the amount originally invested. If investing in foreign currencies, the return in the investor’s reference currency may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results and may not be repeated. Forecasts are not a reliable indicator of future performance.

There is no minimum investment period, though we would recommend that you view your investment as a medium to long term one (i.e. 5 to 10 years).

Investments in the transferable securities of smaller companies may be less liquid than the securities of larger companies as a result of inadequate trading volume or restrictions on trading. Transferable securities in smaller companies may possess greater potential for capital appreciation, but also involve risks such as limited product lines, markets, financial or managerial resources, and trading in such securities may be subject to more abrupt price movements than trading in the securities of larger companies.

Frequent political and social unrest in Emerging Markets and the high inflation and interest rates this tends to encourage, may lead to sharp swings in foreign currency markets and stock markets. There is also an inherent risk in the smaller size of many Emerging Markets, especially since this means restricted liquidity. Further risks to consider are restrictions on foreigners making currency transactions or investments.

The Sarasin Thematic Global Equity Fund may invest in derivatives for efficient portfolio management purposes. This means Derivatives can only be used to manage the Fund more efficiently in an attempt to reduce the overall risk of its investments, reduce the costs of investing or generate additional capital or income, although this may not be achieved and may create losses greater than the cost of the derivative.

This document does not explain all the risks involved in investing in the Fund and therefore you should ensure that you read the Prospectus and the Key Investor Information Document, which contain further information including the applicable risk warnings. The Prospectus, the Key Investor Information document as well as the annual and semi-annual reports of the Fund are available free of charge from www.sarasinandpartners.com  or from Sarasin & Partners LLP, Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, Telephone +44 (0)20 7038 7000 (telephone calls may be recorded).

Persons domiciled in the US and/or are US nationals are not permitted to hold shares in the Fund and shares may not be publicly sold, offered or issued to anyone residing in the US or to US nationals. This publication is intended for retail investors in the UK only.

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