The more I thought about the issue, the more became convinced that thematic investing could be an appealing way to build a long-term portfolio, rather than focusing funds that only invest companies that happen to be domiciled in the same area.
In truth, I have little to no idea about what the future holds for UK, US, European, Japanese and emerging market companies. However, I’m pretty sure that themes such as specialised areas of healthcare, waste management and IT security will become increasingly important over the years and decades ahead.
Of course, that doesn’t necessarily mean that every fund manager will identify the best way of playing these themes, which is why I’ll be putting a number of portfolios under the spotlight in coming articles of this series as I decide which to add to my SIPP.
When I asked Adrian Lowcock (pictured), head of investing at AXA Wealth, about this, he said: “There is no doubt themes can be major driver of investment returns but they should not be followed blindly without an eye on fundamentals, doing so can lead to investment bubbles and excessive valuations. However themes allow a manager to focus on and identify long-term opportunities which may be missed otherwise.”
“One of the biggest challenges in how to profit from a theme - for example tech made and lost investors a lot of money and the winners were few. Some winners were not those you'd expect and were established businesses able to adapt.”
All good points to consider. But why have I become a fan of thematic investing? A report by Bank of America Merrill Lynch last year highlighted a number of world themes that it believes are attractive well into the future, with a few facts and predictions really standing out:
∙ One in three UK jobs will be replaced by computers in the next 20 years
∙ Extreme weather now covers 8 to 10 per cent of the planet, up from just 0.1 to 0.2 per cent between 1951 and 1980
∙ The average successful cyberattack cost $12.7m per US company in 2014 and cybercrime costs the global economy an estimated $500bn annually
∙ In 2015 there will be 7.2 billion internet-connected devices, up from 500 million in 2003. This is expected to grow to 50 billion by 2020
∙ By 2030, global food demand is set to increase by 50 per cent, energy demand by 50 per cent and water demand by 40 per cent
∙ The number of people aged over 60 is forecast to grow from 841m in 2013 to more than 2bn by 2050. Since 1980, average life expectancy has risen by 20 years
That’s just a rather random selection of the factors driving global mega-trends, but it seems clear that vast returns can be made in exploiting the opportunities and solving the challenges thrown up by them.
Ageing populations
The fact that people are living longer is one of the major megatrends playing out in the markets today and creates opportunities within a number of sectors, including healthcare and financials, although all areas of society and the economy are likely to be affected by this theme.
Healthcare seems to be a standout area here for me as high life expectancies mean increased rates of chronic and degenerative diseases, boosting demand for medical devices, vision treatments and dental care. In the US, 65 per cent of healthcare spending is by the over-65s.
The area also has other compelling drivers aside from the demographic theme, which makes it particularly attractive, with interesting areas including biotechnology and generic medicines. There are plenty of funds focused on the healthcare sector, including Invesco Global Health Care, Polar Capital Healthcare Opportunities and AXA Framlington Biotech.
Financial companies – especially the insurers – also benefit from the ageing populations theme and again there are funds available that focus on this part of the market. Meanwhile, the spending power of the over-60s is tipped to rise to $15trn by 2020, benefiting some consumer firms.
A sustainable world
Resource scarcity and pollution are two concerning trends that are never far from the headlines and the problems created by these two issues are only going to worsen over the years ahead. But this means there going to be huge gains up for grabs by the companies that can address these challenges.
There’s many funds out there with a focus on ‘green’ companies. These include Jupiter Ecology, L&G Global Environmental Enterprises, Pictet Environmental Megatrend Selection and Alliance Trust’s Sustainable range.
While these take a broad approach to the environment, there are some more niche ways to play the this theme: for example, the water market could reach $1trn by 2020 as more attention is paid to water treatment, management and supply, while the need for alternative sources of energy mean clean energy such as solar is likely to be attractive in the years ahead.
Again, there are several funds that concentrated on more specialised parts of the environmental theme, such as water and clean energy.
The spread of technology
Another megatrend that certainly has a strong future is the rise of technology. Funds that have gained a strong following in this area include the likes of Fidelity Global Technology, Henderson Global Technology and GAM Star Technology.
As mentioned above, there are expected to be 50 billion connected devices by 2020 – that’s six per person. Meanwhile, experts reckon that the average $1,000 laptop will be able to communicate at the same speed as the human brain by 2023, while innovations such as the ‘internet of things’, big data and analytics will revolutionise how businesses are run.
Technology research firm Gartner say global IT spending is expected to reach $3.8trn in 2015, with devices and enterprise software being the segments of the market showing the strongest growth. That’s only expected to rise in the coming years.
Security
Alongside the increased use of technology is the proliferation of criminals looking to exploit this. There were an estimated 122,000 cyber-attacks each week in 2014 with high profile targets during the year including eBay, Sony Pictures and JP Morgan.
The World Economic Forum now recognises cybersecurity breaches and critical infrastructure breakdowns as one of the top five risks facing the global economy, while Gartner expects 40 per cent of large enterprises to have formal plans to address aggressive cybersecurity business disruption attacks by 2015, from a very low base today.
What’s more, security in general – trying to protect possessions, property or even state boundaries – is another growth area that I believe could be a strong theme for a long-term portfolio.
Living ethically
Ethical and socially responsible investment is still a niche interest in the UK; figures from the Investment Association just £10bn was invested in ethical funds at the end of January, which equates to just 1.2 per cent of industry funds under management.
I already have exposure to one ethical fund in my ISA – Kames Ethical Cautious Managed – but there are plenty of options out there. Ethical investing is ignored by the bulk of investors, but I think the coming years will bring increased pressure for companies to show they are acting in a socially responsible manner.
In the next article of the series, I’ll start narrowing down the thematic funds that have caught my eye and explain which ones I have decide to drip-feed into.