Economies and markets have been, and will continue to be, shaped by mega-trends. Whether it is the emergence of a new technological trend or the structural increase in demand for resources as world’s population grows, these global mega-trends will provide opportunities to investors who can take a long-term view and identify the opportunities well before they become mainstream.
This is where thematic investing comes in. Thematic investing is about capitalising on future trends – identifying (and profiting from) the winners and, just as importantly, avoiding (or underweighting) the losers. Its forward-looking nature contrasts with the more widely used approach of market capitalisation investing, where it is implicitly assumed that the past winners will continue to win and therefore deserve a greater weight in the portfolio.
While many investors are focusing on the past for guidance and/or what will happen over the short term, rather than those on the distant horizon, say five or ten years’ time, investors with a long-term investment horizon need to think and invest differently from the way that they have always been doing. We see thematic investing as a relatively untapped area that institutional investors can use to get an advantage over their peers, particularly if they have a genuinely long-term investment timeframe.
The thematic approach does not replace existing asset allocation strategy, rather we believe that investors should embed this type of thinking in every aspect of their asset allocations. It is simply a different way to think about the world ahead, and invest accordingly, across a range of markets and asset classes. Thematic investing is typically overlaying a series of positions on top of a core asset allocation, whether asset-class-based or return-driver based.
For example, a conviction in the existence of a long-term macro theme associated with resource scarcity and climate change may be captured through thematic smart beta, focused on strategies that will be beneficiaries of the theme. Furthermore, smart beta portfolios may also be structured around indices constructed on sustainability factors. We discuss smart beta strategies as part of an investor’s portfolio in a Willis Towers Watson paper titled “How to exploit smart beta strategies?”, which can be downloaded at AsianInvestor.net.
The challenge for investors is to decide in which themes they have the greatest conviction, and then look to invest in those areas best-positioned to capture that theme. The degree of conviction in a theme influences the size of the position used, subject to risk management disciplines.
Towers Watson has identified six mega-trends that we believe will shape world economies and global markets over the long term and also developed a thematic framework as presented in its publication entitled Secular Outlook 2013 (available for download at firstname.lastname@example.org. We believe that mega-trends and their impact can play a greater role in portfolio construction to exploit winners or losers. The table below is an example that gives a simple illustration of how Willis Towers Watson applies thematic thinking to private markets portfolio strategy.
If you wish to discuss more about thematic investing in more detail, please get in touch with the consultant who normally advises you at Towers Watson, or:
The contents of this article are for general interest. No action should be taken on the basis of this article without seeking specific advice.
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