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Investing in Themes

Traditionally, when deciding where to invest, decisions are made based on geography and asset classes

Coins in soil with young plant

by
Adam Martell

in Professionals Network

19.03.2021

Investors make decisions at country levels, for example, questioning whether the prospects for the UK look better than US equites, or alternatively they invest in order to benefit from the growth potential of a particular region, for example, European versus Asian shares.

However, today, a new approach is evolving – a way of thinking that cuts through boundaries and embodies values, concepts and most importantly of all, themes. These themes are long-term and powerful forces that will reshape our world: socially, demographically, environmentally and technologically. Themes apply to all types of investors, but particular when adopting a long term investment time horizon as this offers the greatest opportunity to compound growth over several decades. 

Themes are long term transformational forces with the capacity to change global social, economic, and political landscapes. Thinking about the way we live, work and play over 10, 20, 30 years or more is important in establishing a normative approach.  Investing thematically is a way of investing in a set of value driven ideas, rooted in what you believe to represent structural changes within society and therefore economies too.

Sustainability image

Themes or Trends

From a thematic perspective, this enables investment to be driven into key strategic areas, without a home market bias or a country specific weighting.  Themes are undoubtedly easier to envisage and enable us to look beyond geographic boundaries.

A theme is often mentioned alongside a trend. This may sound like semantics but knowing the difference between a trend and a theme is important.   Trends represent actual observable, often physical, changes in our environment, and are more likely to be tactical and narrower.  Thematic investing, on the other hand, looks at a topic or set of ideas with a normative line of thought over the longer term. In other words, it makes value judgements of “what ought to be”.

Stock markets tend to overreact both positively and negatively. In many ways, they can be compared to a pendulum.  When considering a thematic investment style, it is important to test your thinking. Is this strategy blinded by the latest fads? Or does it represent a structural shift in the way we work, live or play? What would make me change my mind about this theme? And how would I react if that is the case?

This is where process and strategy are important. Being sufficiently robust enough to follow a rigorous and clearly articulated investment process, yet sufficiently open minded to adapt.

Theme in Focus - Demographics

"Prediction is very difficult, especially if it's about the future."  But is that true of demographics? Since the start of the UN projections in the 1950s, they have built a good track record of predicting population growth.  Contrary to popular opinion, the global population growth rate (determined by number of births and deaths) has already slowed, reaching its peak at over 2% in the late 1960s and has been falling since. However, the UN projects that the global population will increase from 7.7 billion in 2019 to 11.2 billion by the end of the century.

Demographics move like a cruise liner rather than a speedboat. Not only that, a cruise liner with state-of-the-art GPS navigation, so you can see what is even years ahead. When we talk about the global population expanding, you can be forgiven to think that this means more babies being born.  But in fact, 422m of the 754m increase in population between now and 2030 will be the over 55s – only 120m will be under-25s.  We are simply living longer.

demographic investing

This is an important point within this demographic theme. Nearly a third of the world’s high-income population are now in the over 55 years generation. Or to put it another way, one fifth of the global economy.  Yet it could be argued that some of the world’s leading companies ignore their needs, in favour of a relatively declining number of younger people. This group still represents a very important consumer with their needs typically more service-based than product-focused. For example, they want mobility but perhaps aren’t so bothered about actually owning a car. If companies are worried about missing the boat (or cruise liner), then fear not, as thanks to the continual advancements in healthcare increasing life expectancy globally this is an ever growing demographic.

Demographics is closely linked to consumerism – the most important growth factor within most economies around the world. Much has been discussed about the need for more sustainable, environmentally aware products already, so I won’t cover that topic here, other than to say there are clear links between consumer behaviours and sustainability.

Consumers increasingly demand products that are healthy, sustainable, and rooted to an authentic brand and mission. Natural and organic food sales continue to grow both and capture a greater market share.

Today, there is a generation of people to whom digital technology has pretty much always been part of their lives. These people, myself included, are just now having children. Some of the world’s most successful entrepreneurs are also starting families of their own. Whilst the number of working mums has doubled in the last 40 years, it arguably took until the Covid-19 pandemic for products and services to meet more flexible demands of work and home life.  Therefore, just as there is growth potential for the over 55s, with potentially financial independent children, there is a huge opportunity within those starting their families.

demographic cogs

Demographics also study urban growth or so-called “urbanisation” and the move to cities. For the first time in history, more people are living in cities than rural areas. This is a growing trend. By 2030, an estimated five billion people will live in urban areas. International tourist arrivals will rise from 1.1 billion in 2014 to 1.8 billion by 2030 and travel between cities will increase too. The biggest technology companies in the world are working on transportation infrastructure and mapping technology, including a mass of sensor-enabled devices that add networking intelligence to the real world, that allows for software to develop at an even greater level of scalability. Infrastructure has traditionally relied on government resources, but increasingly companies are recognising the growth potential, such as electric cars and charging networks.

tourism trends

Conclusion

Thematic investing typically means abandoning rigid regional or sector classifications. This can be too big a step initially, so if we apply behavioural science, an initial “nudge” can be helpful.  A dedicated thematic investor might argue traditional descriptors, such as countries or asset classes, provide little added value, both in terms of evaluating the growth potential of companies and of risk mitigation through diversification. Themes usually span multiple regions, sectors and business ecosystems. Looking for consistent exposure to a particular theme can therefore help to ensure a portfolio is structurally geared toward high growth and economic value creation.

One thing that doesn’t change is the demands on time and resource, so identifying specific themes as a first step in the investment process, allows for a more useful allocation of resources. For example, instead of covering all regions, sectors and individual stocks (of which there are over 53,000 worldwide) more attention can be paid to all shares associated with an identified, investable theme.  A passive index tracking investment style would argue that you can replicate markets on a global, regional or country specific basis. However, this could be a simplified approach that risks holding companies simply based on where they are listed, or they are part of the old economy and thus less engaged with the themes above and as such have corresponding lower rates of growth.  Crucially, thematic investing provides a lens in which to focus your investment style, especially for growth.

Adam is part of the Charles Stanley Professionals Network; designed to connect and educate the next generation of investors. Read more articles from our network contributors and find out how you can be part of the network.

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