The trends that change the world should change our investments. That’s the view taken by Pictet Asset Management, a global leader in thematic investing and manager of John Hancock Global Thematic Opportunities Fund.
Despite their hopes to build strong long-term track records, many investment managers focus on short- and intermediate-term changes in the economy and markets. What’s the corporate earnings forecast for the next 12 to 24 months? How vulnerable or resilient are company fundamentals to bouts of volatility and rising risk aversion? How will valuations shift as we muddle through the late stages of the current economic cycle? Asking questions about the longer term is frequently seen as fraught with too much complexity and obscurity to be useful.
But questions focused on the long term are precisely what thematic investors like to ask. As we practice it, our thematic investing approach seeks to take a multidecade view of structural change affecting the economy, society, and the environment. That’s why thematic investing is so well geared toward meeting long-term liabilities—whether we’re talking about an individual’s retirement plan needs or a pension plan’s long-term asset-liability matching commitments.
Themes powered by enduring sources of capital growth
That’s not to say that taking a multidecade view is an easy task. A special kind of structural lens is required to even begin to frame a coherent view of investable themes that stand a good chance of being sources of compelling investment ideas over the decades to come.
In our investment practice, we say that long-term themes are driven by megatrends—fundamental shifts in technology, culture, the environment, and other underlying conditions that are moving with inexorable force. To be an investable theme for the long term, it must be supported by a rich narrative of deeper transformations in our world.
An example known to virtually everyone today is clean energy, which we at Pictet have long viewed as an investment theme that will dominate energy markets of the future.
The case for clean energy is, of course, more than just a function of the need for long-term sustainability in our energy markets—although that’s obviously a critical driving force as the world seeks to transition to a carbon-neutral future. It’s also driven by a collective focus on health that crosses developing/developed market borders; the long arc of technological development that has seen the world transform digitally and materially across economic sectors; the increasing global connectedness and flow of people, capital, products, services, information, technology, and culture—which is commonly referred to as globalization—and it’s driven by long-term changes in the economy.
Thematic purity: favoring specialist companies over conglomerates
In our investment practice, different themes may represent different levels of abstraction and generality; our investment themes normally span a number of economic sectors and are invariably global and long term in nature. Each theme also harnesses different combinations of megatrends. In all cases, we translate the abstract concepts underlying a theme into a list of coherent and concrete characteristics that potential investments must share.
Our aim is to outperform traditional equity markets by identifying the next generation of market-leading companies. To that end, an important criterion for inclusion in our portfolio is thematic purity. Companies whose activities predominantly lie within the scope of a particular theme are the primary candidates for investment.
In our digital theme, for example, we focus on a variety of companies operating in the area of mobile internet access. Specialist companies in digital mobility and cloud computing, as well as smart software and big data, are all bent on creating disruptive innovations that in turn offer investors meaningful exposure to the growth potential of this area.
Future perfect: multiple perspectives aid thematic investors
Given that such developments take years to unfold, the more useful investment insight a thematic strategy can offer must combine a unique understanding of history and a specialist-informed perspective on the future.
At Pictet, we’ve approached this problem by collaborating with megatrend experts, a distinguished group of industry practitioners and academics who’ve developed a deep understanding of the structural trends transforming our world.
The role of these outside experts is to shed light on megatrend dynamics and how they might shape the prospects of the industries in which we invest. They don’t dictate which stocks we should include in our portfolio, but they do help us maintain a sufficiently long-term perspective in identifying future trends, evaluating the regulatory environment, and defining key subthemes where we can hunt for the most attractive pure-play equity opportunities.