How to invest in the megatrends changing our world
Thematic investing has been around for a long time, but interest in funds looking to monetize global ‘big picture’ trends has increased in recent years.
Simply put, thematic investing is a strategy that identifies changes that are believed to disrupt established markets and industries, for example artificial intelligence or electric vehicles.
Sustainable and climate-related themes have also attracted a lot of interest from investors due to the cash being piled up in the fight against this global emergency.
Many investors believe that these themes could generate excessive market returns in the future.
Looking at a crystal ball: Thematic investing is a strategy where investors identify global trends that can disrupt and monetize existing industries
Some firms, such as Newton Investment Management and Pictet, have therefore embraced thematic investing as the core of their approach.
Last year, Charles Schwab also launched thematic stock lists for investors who want to invest in companies that align with their personal interests and values.
Jason Hollands, director of Bestinvest, explains: ‘It is about identifying major themes – also known as megatrends – in society and the economy that will play a role in the coming years and then trying to identify companies that will benefit from them. .’
You’d be forgiven for wondering if thematic investing is just dressed up sector investing.
But investment firm BlackRock believes theme funds and sector funds are very different propositions.
A BlackRock spokesperson said: “Themes focus on structural growth or disruption and seek to capture a one-time shift that will have a lasting impact on the current economic climate.
Sectors, on the other hand, are cyclical in nature, with investment allocations often determined by short- to medium-term views of the business cycle.
“One reason to invest in themes is the focus on groups of disruptive companies that will become a much larger part of global equity markets in the future.”
Hollands adds: “Adopting a thematic mindset can make the process of investing quite exciting because instead of just focusing on the nuts and bolts of earnings, valuations and dividends, you think about the big picture .’
What are the limitations of thematic investing
When you use thematic investing as a strategy, you are essentially looking into a crystal ball and imagining what the world might look like in the coming decades.
But this poses problems because the future is unpredictable and the world does not always develop in the direction generally expected.
Hollands says: ‘It was not so long ago that the end of the Cold War was expected to usher in a peace dividend and the rise of globalization seemed unstoppable.
“Now we have Russia fighting a war in Europe, relations between the west and China are deteriorating, and the peak of globalization is over, with more focus on supply chain security.”
Some investment themes may also turn out to be passing fads and die out.
Kenneth Lamont, senior analyst at Morningstar, said: “There is a risk that the theme may not turn out the way you hoped.
“There are themes, such as 3D printing, that may yet change our lives, but have not played out as dramatically as we expected. If we had believed all the headlines, we would have expected to be printing our own McDonalds burgers at home by now.”
Once a major theme gains recognition, it can sometimes mean a herd of investors scrambling to invest in it, AI being a current example.
Hollands warns: “This can sometimes leave thematic investors susceptible to exposure to investment bubbles, where exuberance on the theme pushes valuations to extreme levels, eventually leading to a blowout. That’s not always the case, but it’s something to be careful about.’
Investors should also be wary of ‘theme washing’ when it comes to thematic investing.
In some cases, thematic funds end up being dominated by big tech giants that have small exposures to many themes.
Says Lamont, “This raises very real concerns about theme washes – investors should not just be impressed by a strong narrative and really understand whether the fund provides enough exposure to the desired theme.”
AI mega trend: There is a risk of exposing investors to large thematic bubbles that could burst
What are the ‘megatrends’ likely to dominate the future?
Megatrends are the themes that investors identify as most likely to change on a global scale.
This could include an aging population causing changing consumption patterns or a growing population requiring more efficient use of resources.
Bestinvest identified demographic shifts as a megatrend. Hollands says: ‘The world’s population has grown by 80 percent in the past 40 years and this is partly due to improved life expectancy, but the patterns differ considerably between countries.
In Japan, for example, the average age is 48.6 and the population is declining, while China is determined to follow this trend due to the disastrous former “one child” per family policy.
“Countries with aging populations face economic challenges, but investment opportunities include demand for health care, greater use of automation to address labor shortages, and greater demand for leisure time to accommodate a growing number of retirees. to serve.’
The transition to a low-carbon economy and away from fossil fuels is another megatrend. The journey to Net Zero carbon emissions is fueling demand for resources needed for clean energy infrastructure and electric vehicles, such as copper, nickel, lithium, cobalt, graphite and rare earths.
Which funds can you invest in?
Aubrey opportunities for global emerging markets is a fund that focuses entirely on the theme of the increasing power of consumers in emerging markets and their demand for goods and services.
Hollands: ‘With ETFs it is now increasingly possible to concentrate on very specific themes, such as artificial intelligence (Legal & General Artificial Intelligence UCITS ETF), robotics (iShares Automation & Robotics UCITS ETF), or the demand for metals important for future technologies such as use in electric cars and smartphones (Global X Lithium & Battery Tech ETF).’
Fidelity’s main thematic fund is Global Thematic Opportunitieswhich invests in a range of themes including global demography, technology, healthcare, climate solutions and clean energy.
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