Stay on the money with stockpicking
Trends have become very fashionable in the investment world over recent years. We're no longer limited to a choice of geographical region, asset class or managerial style when we select collective funds.
These days, if we believe the world's economies are likely to be fundamentally shaped by, say, ageing baby boomers, the growth of emerging market consumers or climate change, we can find a fund that invests in the companies best placed to tap into and benefit from that theme.
Yet 30 years ago, few people talked about global themes or trends in investment. Investors, markets, industries and most companies were primarily domestically focused.
Anyway, if the chattering classes argued at dinner parties about some of the mega trends still driving thematic fund managers' stock selection, it would have been hard for fund managers to take much of a global view in practice because they had nothing like the ease of access to global markets now available.
So what is meant by thematic investment? Guy Monson, chief executive of thematic investment house Sarasin, starts by narrowing the parameters. "It's not about trying to select global equities on the basis of industry, country, style or other such filters, he says.
"It is about buying shares in companies that are backed by an inevitable long-term trend or theme - and within that theme, the wider the universe of possible shares and the more international they are the better."
In practice, however, pinning down the definition of a theme can be quite difficult, as managers interpret the term differently.
"In the late 1990s the term 'theme' started to be used a lot more, but people actually meant 'hot' sectors such as telecoms and technology," says Steve Goldin, vice-president of strategy indices at Standard & Poor's Index Services.
And some still refer to those sectors in thematic terms. At Newton, which recently celebrated 30 years of thematic investing, chief investment officer Jeff Munroe says that telecoms and technology has been an enduring theme for 20 years.
"Having had a very bad few years since the end of the last decade, areas such as mobile and internet technology are now showing very strong growth, fuelled by growth from emerging market consumers."
But Munroe stresses that a theme such as 'technology', where there is a 'following wind' for future growth, is just a starting point. "We don't try for blanket cover of a theme; we're looking for areas of particular opportunity within it, and we also identify areas that we're definitely not interested in."
Laurent Ramsey, chief executive at Swiss investment house Pictet Funds, agrees there can be a fine line between a sector and a thematic fund. "Timber, for example, could be considered as a sector (although in reality it's too tiny), but as a theme there are many aspects of the value chain for a fund to tap into - forestry, wood processing, construction and transportation."
So where did the earliest thematic investors focus their attention? Munroe, who has been at Newton for 17 years, admits: "Nothing was very formalised in the early days. It amounted to a few guys sitting around talking about investment ideas, but clients wanted to know about their investment philosophy, and gradually the theme ideas ended up on paper."
By the early 1990s, themes such as globalisation, technology and the industrialisation of the former Soviet bloc countries were on Newton's radar. By the end of the 1990s, funds with overblown names such as Gartmore Tech Tornado and Merrill Lynch Global Titans had lumbered onto the thematic merry-go-round and, more recently there has been a rash of clean energy, water and renewables funds focusing on the climate change issue.
Clearly, themes can wax and wane, and in some cases even disappear. But at Sarasin, which began life in the mid-1990s, Monson picks out "corporate restructuring" - perhaps better termed an "investment story" - as a core theme that has stood the test of time.
"It started as privatisation, then we focused on equity for debt swaps in the late 1990s, mergers and acquisitions activity in the early 2000s, and then emerging market privatisations. Now we're looking at the strong companies that are set to get stronger in the face of this global downturn."
Another long-running theme is global population dynamics such as the West's ageing population. "It's been running for 20 years for us, and has huge implications for savings, healthcare, housebuilding and consumption," explains Munroe.
However, here too the managers are ready to embrace changes as the trend plays out. "We're now at an interesting point, because although the baby boomers will be with us for the next 20 years, there will be different attitudes to many money issues in the aftermath of this financial crisis," he adds.
Schroder's head of global equities, Virginie Maisonneuve, also highlights global climate change and the commodities super-cycle, driven by the dynamism of emerging markets and its impact on the world economy, as true long-term trends.
"Understanding how a company's growth is helped or harmed by these trends is an enormously powerful tool for stock analysis," she observes.
Typically, thematic managers are looking at a theme life of at least several years - Monson at Sarasin takes a 10-year perspective, for example - but sometimes events may curtail a theme's relevance.
Mike Jennings, who runs Premier's Global DSR fund that launched in March 2008, says: "When I was at Morley in the early 2000s, we had a 'disinflationary world' theme, looking for companies with strong pricing power that would not be vulnerable to falling inflation, but by 2004, deflation really wasn't a major driver, so we let it go."
Similarly, Ramsey at Pictet recalls a telecoms fund launched around 1997, when there was no dedicated sector, but interest was gathering rapidly. "Then a MSCI telecoms sector was introduced and the whole area became too mainstream and over researched, so we repositioned the fund," he says.
One important point made by thematic managers is that a global theme is a macro-based starting point for share selection, but it's not an end in itself.
Charles Richardson, chief executive at thematic specialist Veritas, emphasises that once a theme has been decided upon, it then needs to be backed up by bottom-up fundamental analysis of individual stocks.
"One of the difficulties with thematic selection is that themes or trends, by definition, can become fashionable, which means people end up buying into them without doing the basic research or evaluation, he explains. "It's crucial to make sure you're still buying good value."
Indeed, it's important to recognise that thematic approaches have a number of potential pitfalls for investors. One is the risk that managers may be sucked into momentum investing - buying into superficially suitable shares because they are interesting and popular (not because they offer quality and good value).
Monson adds that as a thematic investor, there may also be timing issues. "A thematic approach tends to bring you early to the party, but you have to sell early too - you cannot afford to buy and hold." Moreover, a major external upset such as the financial crisis can impact hard on related themes.
Stephen Marriott, senior research analyst at Bestinvest, adds that many thematic funds are also marketing-led. "By the time the fund has come to the market, the trend or theme has run its course, he suggests. "The closure or merger of a raft of privatisation funds and several globalisation, tech and biotech funds over the past decade supports this argument."
He maintains that most investors are better off with a good generalist manager who "will position the portfolio to take advantage of emerging themes wherever they may be".
Exchange traded approach
One alternative approach - if you're not convinced by the abilities of active managers - is to make use of the various exchange traded funds following the S&P range of 11 thematic indices introduced in March 2007. These include clean energy (via iShares Global Clean Energy index fund), infrastructure (db x-trackers Global Infrastructure index fund) and forestry (iShares Global Timber and Forestry index fund).
Whichever route you take, there's a strong argument that our global marketplace makes a thematic approach much more viable and relevant. Certainly, the serious players in the thematic arena have been successful. But as Richardson warns: "Investors shouldn't expect too much - it's not necessarily easier to invest this way, nor is it a panacea for all evils."
This article was originally published in Money Observer - Moneywise's sister publication - in October 2009
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
A property chain is a line of buyers and sellers (the “links”) who are all simultaneously involved in linked property transactions. When one transaction falls through – for instance, someone can’t get a mortgage or simply withdraws their property from sale, the entire chain breaks and all the transactions are held up or even fail entirely.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.