The last decade has seen both thematic as well as sustainable investing moving into the mainstream, often precipitated by a transfer of wealth from older to younger generations. We view thematic management as the best way to capture the secular growth of markets. Identifying specific themes that are growing faster than the broader global economy and that remain consistent over time rather than based on seasonal or cyclical trends can also provide investors with attractive diversification opportunities.
At Thematics, we look for secular growth derived from the evergreen root causes of societal shifts that are shaping the way that we live – namely global Demographic Change, Technological Advances, Globalization and Resource Scarcity. In a low growth environment thematic investing can present investors with attractive growth opportunities that the current situation has further highlighted. The speed of societal adoption in relation to trends that are reshaping our world has clearly accelerated in the current context.
Examples can range from the necessity for businesses and individuals to continue operating remotely, to the greater need for home services, more online health, more online education through to a greater focus on cybersecurity or sanitation. As such Artificial Intelligence, Robotics, Safety, Water and the Subscription Economy are all themes that are rapidly becoming more prevalent in every aspect of our lives. A thoughtfully assembled multi-thematic portfolio therefore has the potential to generate sustainable risk-adjusted excess returns over the long-term.
When considering a long-term investment horizon, it is essential to also consider environmental, social and governance factors that are likely to impact a company’s risk profile with the obvious reason being the longer the time horizon the more likely it is for those risks to materialize over time. We believe that effective ESG integration leads to better informed investment decisions, helps mitigate portfolio risk and supports long term value creation for asset owners. We also believe that non-financial criteria are crucial in de-risking portfolios and delivering excess returns. Negative screening to exclude parts of the universe on ethical grounds, position sizing considering ESG scores to mitigate potential risks, and undertaking our fiduciary duties (proxy voting, engagement) are core to the process. Furthermore, we report on ESG risks and opportunities (‘so-called ‘Impact’) on an ex-post basis.
Our multi-thematic META fund makes equal-weighted investments in the 4 underlying strategies of Water, AI & Robotics, Safety and Subscription Economy. The diversified profiles of the strategies involved have highlighted the ability of the portfolio to provide resiliency and generate excess returns in both up-market and down-market configurations. Beyond that, understanding what the strategies invest in and why is crucial to understanding the opportunity.
Within the allocation to the Water strategy for example, investors are able to gain access to investments made in the only, true life-sustaining resource with all of its relative defensive associated characteristics, while accessing thematic growth associated with the massive and essential investments required in developing new water and wastewater infrastructure in emerging market such as China and Brazil.
Within the AI & Robotics strategy, the example of the growth of machine learning algorithms – which are redefining manufacturing processes, data processing and activities as diverse as remote surgery to the design of your next pair of trainers – is presenting an opportunity that the portfolio managers find particularly compelling.
Furthermore, the dramatically increasing number of connected devices in the world has created an ever-expanding surface area for hackers to exploit, at the government, industrial and individual level – with firewall and protection software a growth theme capitalized upon, among others, in the Thematics Safety strategy. Finally – with Covid-19 having confined most of us to working-from-home for a prolonged period over the spring and summer, our new-found reliance on internet-based services such as on-line educational tools, film, music and tv streaming services, and connected fitness was laid-bare. What these services all have in common, as with our mobile phones, pc software, gym memberships among others, is that they are all delivered via subscription – a massive growth opportunity that is the focus of the Thematics Subscription Economy strategy.
In summary thematic investments translate complex evaluation processes into strategies that investors can understand. With individuals placing a greater emphasis on aligning values with investments, a growing awareness of environmental and social challenges, and a desire to understand underlying investments, thematic investing has gained significant traction globally and has no doubt a bright future ahead.