Why thinking thematically helps us secure tomorrow
Investors today are challenged by slower trend economic growth, largely due to a decline in population growth and subdued productivity gains. Meanwhile, climate change and resource depletion will have an increasing impact not only on economic growth but on all of our livelihoods. What is the best approach for investors?
We believe that a thematic approach not only helps us find the most compelling long-term opportunities but allows us to invest in the trends that have the power to improve societal welfare. Investing thematically is how we secure tomorrow.
Where there is disruption, there is opportunity, as investors typically underappreciate the duration or magnitude of change. Change leads to shifts in competitive advantage, with weak companies disappearing and great companies adapting. A thematically-led investment process narrows our focus to companies that benefit from these changes, enabling us to identify the global companies that can thrive in this era of disruption.
We believe there are five key megatrends that will play the most significant role in shaping our futures. In our view, these are the disruptive themes that will define the first half of the 21st century and the outlook for company revenue growth and cashflows.
The five themes shaping our world
Today, 9% of people are aged 65 and over. By 2050, 17% of the world’s population will be over 65. The world’s older population continues to grow, spurred by improving life expectancy and a lower fertility rate. How we work, pay tax, and save will change, and patterns of consumption will shift, bringing opportunities in financial services and healthcare.
Key trends in ageing:
- Genome sequencing will transform our ability to research, diagnose and treat medical conditions
- Advances in data and biology will converge to facilitate the ‘future human’, who will see vast improvements in longevity and quality of life
- A move towards a value-based care model will incentivise healthcare organisations to focus on patient health outcomes and enable them to better manage complexity
- As COVID-19 has proved, pandemics are a real and present threat – how can we best protect ourselves against them – and manage the threat of antimicrobial resistance?
- Development in healthcare means that the 100-year life will become commonplace. Funding this life will change the landscape for the pensions and insurance industries, in both emerging and developed markets.
- Increasingly, people are getting rich before they get old, giving them the chance to spend money on things that fulfil them, such as bucket list items
Climate change will lead to profound upheaval and its impact is underestimated by society and investment markets alike. Our lives will be shaped both by how well we can reduce the adverse effects of climate change and by the extent to which we can adapt to what we cannot mitigate. In endeavouring to meet these challenges, a broad range of investment opportunities will emerge, from renewable energy and electric vehicles to smart buildings and agriculture.
Key trends in climate change:
- The depletion of the world’s environmental resources is intensifying due to climate change, and will require both mitigation and adaptation
- The building and construction sectors need to decarbonise. Meanwhile, infrastructure will increasingly need to adapt to the impact of climate change.
- Decarbonisation will see a shift from carbon-intensive power to low-carbon power, such as wind
- To combat climate change, we will need to decouple resource consumption from economic output, which will see increased reliance on circularity and resource efficiency
- The transition to net-zero will see a shift from carbon-intensive transport to low-carbon transport, such as electric vehicles
The combination of shrinking labour forces in most advanced economies, falling technology costs and artificial intelligence means that automation will sweep across all industries. While automation is already an established presence in automotive manufacturing and food and drink processes, most sectors of the economy are at an early stage of adoption. Digital networks will enable the collection, storage and analysis of data to enhance the benefits of automation.
Key trends in automation:
- AI, robotics and automation within factories are transforming working practices, making them safer and more efficient
- Supply chain management is harnessing automation to make its processes more streamlined, effective and efficient – as well as more robust in the face of supply shocks caused by geopolitical turmoil or unexpected events, such as COVID-19.
- Automation has the power to make producing and consuming food along the chain more efficient, quicker, safer, while adding value
- Automation can simplify and improve the efficiency of the increasingly stringent testing and verification that products and services undergo before they can be released to the public
- Nascent adopters of automation, such as the security and surveillance industries
The way we consume is changing – a trend that has been accelerated by the impact of COVID-19. Consumers are becoming increasingly interested in fitness, health and wellness, and spending money on experiences and travel is becoming more of a priority. Standards of living in emerging markets will converge with those in developed markets. Younger generations are entering the workforce and becoming influential consumers with different priorities to earlier generations. Entertainment preferences are shifting towards smartphones and on-demand video.
Key trends in evolving consumption:
- Dietary preferences are changing, due to growing awareness of health and lifestyle factors
- People are more interested in their health and wellness and are willing to invest in it
- Consumers in emerging markets are becoming better off, facilitating an increased expenditure on previously inaccessible products and services
- Consumers increasingly value experiences, such as travel, live entertainment, and sports
- Luxury goods, from skincare to jewellery to clothing, are growing in popularity, especially within emerging markets
The world is rapidly shifting from analogue to digital. The pandemic forced great numbers of people to contain themselves within their homes, leading to transformation in how we work, entertain ourselves, shop, and socialise. We are connected in a way we have never been before, and this hyperconnectivity is redefining the way we interact with technology. Processing power is growing exponentially, paving the way for increasingly complex computing. The rise of digital content, transactions, advertising, and data offer significant opportunity.
Key trends in digitalisation:
- As more of us become increasingly interconnected, our reliance on connectivity will grow
- Processing power is what's behind the explosion in computing power, with semiconductor devices regularly becoming smaller and cheaper, yet simultaneously more powerful
- Being able to harness the cloud means that software can be accessed by huge numbers of users simultaneously
- Digital media is a standalone industry and includes software, video games, websites, social media, digital images, and electronic books and content. Consumers are moving away from traditional entertainment – such as newspapers or television broadcasting – and embracing digital equivalents.
- Companies that buy or sell over the internet need technologies, perhaps to help them distribute goods and services through websites and apps and employ services such as chatbots or live chat. Commerce has shifted from in-person to online, and this necessitates new payment channels and providers. Cash is increasingly irrelevant.
- Data provides companies with insights they have never had before – a factor that is extremely valuable for companies wanting to market their products more effectively. This data requires analysis, giving rise to new industries.
The benefits of a thematic approach
1. Investing for the long-term
We seek to align our process with the investment time-horizons of our clients, which are often long-term. This necessitates making good decisions and sticking to them, so understanding the direction of travel is critical. An appreciation of what really matters to a business or industry allows us to filter out the noise and to identify mispricing in the market.
2. Differentiated portfolios
Themes allow us to find a different way to utilise the available market data. For example, rather than grouping companies by size or location, grouping them by how they sell or who they sell to might reveal multiple value drivers. This allows us to build conviction around hot spots where the potential for super-normal returns exist and incorporate them into portfolios.
3. A holistic approach to risk management
The investment industry has developed sophisticated numerical calculations of risk, usually based on an index and a portfolio’s volatility around that index. This has value, but it is not a substitute for common sense or an understanding of what is happening in the world around us. By thinking thematically, we actively consider the broader risks to investment including changing competitive dynamics, environmental or societal factors, governance, or macroeconomic changes such as rising interest rates.
4. Thematic investment complements fundamental analysis
Thematic investing is a complement to bottom-up stock analysis, not a substitute. Our global thematic investment process has three stages: idea generation, stock selection, and portfolio construction.
Having identified attractive themes, we build a set of companies related to that theme. Thereafter the detailed work of understanding the quality, growth and valuation attributes of the company begins. Only if a business is supported by positive themes, is of the appropriate quality to be a long-term investment, and is attractively valued will we invest in it.
5. Stewardship and thematic investment build on each other
Environmental, social, and governance (ESG) analysis is embedded in our analysis of the companies we identify from the themes. ESG factors dovetail with our thematic approach. For example, the need to adapt to climate change and mitigate its effects creates specific opportunities and threats for companies in a range of industries that will be the key driver in their prospects. However, climate change and the broader consideration of natural capital is fast becoming important to all companies.
We take a long-term thematic approach in combination with an ownership mindset. As a result, we seek to buy companies that are positively aligned with society. When considering a stock, we assess it for impact on E, S and G issues using our traffic light system. We then give the stock an overall ESG rating, indicating to what extent ESG impacts the investment case and valuation.
After all, if a company does not act in the interests of society, society will eventually act against such a company to the detriment of its growth and returns.
Seeing the bigger picture
Our thematic investment philosophy helps us develop perspective by taking a top down view of the world, identifying trends and themes that bring some order to the chaos of a rapidly changing world. We look broadly and horizontally across industry sectors and geographies, combining both macro and micro factors, and adopt a global approach, searching for sustainable change. We believe this gives us a better perspective of the investment opportunities available, and ultimately provides our clients with superior long-term returns. Above all, it helps us secure tomorrow on behalf of our clients.