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.
Five powerful themes that drive long-term change
We have identified five ‘mega-themes’ that are shaping society. Each theme contains sub-themes, such as cloud computing, a rapidly growing investment story within our Digitalisation theme.
Digitalisation: Digital products and services are increasingly central to our lives. In the process, they are changing consumer behaviour and how industries operate – and even creating entirely new industries and products.
Automation: Many companies look to automation as a solution to the challenges of shrinking working-age populations, higher labour costs and the need to boost productivity.
Ageing: People are living longer; this is creating significant shifts in demand for healthcare and a wide variety of products and services.
Evolving consumption: Consumer choices are changing due to demographic shifts, technological advances and socio-economic factors such as an increasing wealth levels in Asia.
Climate change: As we grow more aware of the need to respond to climate change, we will see major shifts in global investment as economies attempt to decarbonise, transition to net zero emissions and adapt to living with global warming.
To learn more about Sarasin’s global investment themes, click here.
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%. (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.
 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.
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