Thematic investing: Can you spot a trend?

5 December 2017
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Could you identify a theme that is about to take off across the world? Over the long term, focusing on global trends can help make you a handsome return on your money.

From the rise of technology to ways of protecting the environment, there are many ways to invest in our future. Plus, ageing populations, infrastructure developments around the world, and exciting new areas, such as artificial intelligence, are among other themes catching the eye.

However, although it’s fairly easy to spot potential trends, it’s not always easy to profit from them, warns Patrick Connolly, a certified financial planner with Chase de Vere. “Relevant themes are likely to be known and understood by the stock market – and this could already be reflected in share prices,” he says.

Also, if a theme or sector begins to grow in popularity, then more competitors will arrive on the scene and make the job of picking winners even harder. “Investors must ensure they focus on long-term structural changes rather than short-term speculative or ‘flavour of the month’ ideas,” he adds.

One of the most popular recent themes has been ‘disruptive technology’. This term covers everything that fundamentally changes how we live – such as driverless cars and the progress towards a cashless society.

Adrian Lowcock, investment director at Architas, the multimanager, says: “Disruptive technology is creeping into everything. It affects how we work, what we earn, the productivity of the economy, inflation and economic growth.”

A prime example is the Apple iPhone which has been around for a decade and used by millions of people around the world. Tom Walker, manager of the Martin Currie Global Portfolio Trust, says Apple has not only reinvented the mobile phone but given meaning to the word smartphone.

“The success of the iPhone is based on the richest ecosystem that has ever been built,” he says. “You can download 2.2 million applications for your phone – up from 800 in July 2008.”

Cloud computing, which reduces a company’s investment in hardware and software, is another theme to watch, says Josh Spencer, manager of the T. Rowe Price Global Technology fund.

“It’s one of the most dominant trends in technology and still offers investors meaningful long-term growth potential,” he says.

The ageing population is another unavoidable theme, according to Mr Lowcock.

“It means healthcare will be a major issue and provide opportunities for companies to create new solutions,” he adds.

He believes pharmaceuticals companies may be a beneficiary. “Populations are ageing, and this group of people have money,” he says.

Many pharma companies have positive characteristics that make them good bets for investors.

Mr Lowcock explains: “They are good at generating revenue and can drive efficiencies in the businesses, but also tend to be more defensive in nature, as well as paying a reliable dividend.”

How to invest in themes

Investors drawn to investing thematically, can buy a general global fund or investment trust, which specialises in a thematic approach to investing, or a specialist fund that focuses on a specific theme.

Unfortunately, there is not one Investment Association sector that groups funds that invest thematically, so the funds will be scattered throughout different sectors. This will require some research to put a list of potential funds together that focus on the themes in which you want to invest.

For example, Pictet offers funds focusing on themes such as water scarcity, while Polar Capital is known for managing portfolios concentrating on healthcare.

If you opt for a specialist fund, then you need to do your homework, according to Darius McDermott, managing director of Chelsea Financial Services.

“The manager’s track record is important, and you need to compare its performance on a like-for-like basis, such as a sector specific index,” he says.

It’s a bonus if those at the helm have first-hand experience of the sector in which they invest as they will have a better understanding of the market.

“For example, a healthcare manager that has worked in the pharmaceutical industry or a natural resources manager that has spent time as a geologist,” he says.

However, Mr Connolly at Chase de Vere prefers to steer clear of specialist funds that invest in one theme. “This is because such funds carry additional risks with the underlying investments likely to be highly correlated, meaning they can rise or fall together,” he says.

He does though consider using the funds of investment managers that adopt a broadly thematic approach to their portfolio construction. He highlights Newton as a great example.

“Funds we recommend include Newton Global Income and Newton Real Return, which are taking advantage of themes such as globalisation, new technologies, the influence of China, ageing populations, and the growth of online connectivity,” he says.

ONE TO WATCH: Polar Capital Global Healthcare Trust

 

ABOUT THE FUND

Fund: Polar Capital Global Healthcare Trust
Managers:­ Daniel Mahony (above left) and Gareth Powell (above right)
Launch date:­ 15 June 2010 Fund AUM: ­£282.2 million
Minimum initial investment:­ None
Minimum top-up investment: None
Initial charge: 0% Ongoing charge: 1.01%
Contact details:­ Polarcapitalhealthcaretrust.com

This investment trust, which has a fixed life and is expected to expire in early 2025, aims to generate capital growth by investing in a global portfolio of healthcare stocks. It primarily focuses on listed equities issued by companies involved in pharmaceuticals, medical services, medical devices and biotechnology.

At present, it is invested in 46 companies, with 43% of its net assets in the 10 biggest holdings and 86% in large companies with market capitalisations more than $5bn.

The company, which pays two dividends a year, is also diversified by factors such as geography, industry sub-sector and investment size.

At 64%, the fund is most heavily invested in the United States, followed by 7% in Germany, 5% in Switzerland and 5% in Ireland. The other countries represented, which each account for less than 4%, are France, the UK, Japan and Australia.

As far as individual holdings are concerned, Johnson & Johnson, an American multinational manufacturer of medical devices, pharmaceutical and consumer packaged goods,has the largest share of net assets at 7%. This is followed by the 5% in Swiss multinational pharmaceutical companyNovartis and 4.9% in French multinational pharmaceutical companySanofi.

Other names among the top 10 largest positions include Merck & Co, Celgene, Becton Dickinson, UnitedHealth Group, Medtronic, Bayer, and Fresenius Medical Care AG.

QUICK GUIDE: Consider investing in this area if…

  • You want to invest in themes
  • You believe key trends will be a driver of investment returns
  • You are interested in areas such as technological developments

Read more about funds on Moneywise

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