“Earth Matters”; “Population Dynamics”; “Networked World”; “Construction and Reconstruction”. Next year’s calendar for curators at the Science Museum, perhaps? No – in fact these are some of the concepts driving the thematic investment approach that Newton Investment Management has pursued since inception in 1977.
“Stewart Newton had become quite bored with economists telling him, ‘We think French GDP is going to be 0.3 per cent rather than 0.4 per cent, German inflation is going to be this or that’,” explains Phil Collins, manager of the Newton Phoenix Multi Asset Fund.
“The reliability of those forecasts is quite weak, and in any case if you look at where people have really made money, it’s been from the ability to predict significant changes like, for example, the rise of industrial manufacturing, of the service economy and IT.”
The result was a focus on long-term, secular changes in economies and societies. This can lead to quite focused investment strategies - “Construction and Reconstruction”, for example, is simply about exposure to infrastructure companies and projects, and possibly industrial commodities – or more complex ones like “Networked World”, which is clearly about picking winners and losers in the telecoms sector, but also encompass the media, retail, banking and other companies tasked with positioning themselves within these networks.
The same variety is evident in the four thematic funds that are part of Banque Syz & Co’s 20-strong Oyster Funds range. Oyster Responsible Development is almost a global diversified equity fund with an SRI-style tilt, whereas Oyster Global Warming is focused on companies involved in alternative energy or water and Oyster Oncology on the development of cancer diagnostics and treatment.
Seeing the big picture
Why invest in this way? One claim from Newton’s literature is that, “Because themes are about change, our process is much less likely to be caught out by change.”
Good examples of this principle at work recently were “Becalmed” – developed markets had begun to behave as though the economic cycle had been abolished, leading to the excessive risk-taking associated with peaks in credit cycles – and the related theme of “Debt and Credit”. Newton does not claim to have been able to predict the timing or exact causes of last year’s credit crisis, but the argument is that thematic investment instills a “big-picture” discipline against the siren-song of short-termism: in this case Newton portfolios favoured financials with developing-world exposures over those exposed to the debt-burdened US and UK consumers.
Now the crisis has materialized, “Becalmed” and “Debt and Credit” have been shelved and replaced with a new theme, “All Change” – which sees the medium-term characterized by moderating consumption, increased savings rates and a return to thrift (with regard to money, but also energy conservation and the reduction of food wastage).
“By having the themes in place we are able to justify holding good companies through difficult times,” says Charlotte Winther, portfolio manager and COO with Nordea Investment Management & Funds, which has had a thematic investment process as part of active equities since 1992. “They almost give us the courage to maintain our long-term views on individual companies.”
One might contend that a standard, top-down macro view would instill the same discipline – but at its best, thematic investing goes a step further, deconstructing some of the self-imposed constraints inherent in the traditional asset-management set-up.
“You can find analysts who know everything about European food companies, and others – perhaps even in the same investment house - who are experts on US food companies, but you will not find anyone who knows about global food companies, let alone the entire value chain back to food producers and farming machinery manufacturers,” Ms Winther explains.
“Because the same information is available to everyone instantly in the modern marketplace, the fact that we use that information in a different way gives us an edge.”
A Nordea theme like “Emerging Consumer” cuts across regions and industrial sectors. The developing world’s growing urban middle class is changing its diet, creating opportunities in food production, processing, packaging and retailing; buying electronic, financial and lifestyle products; traveling more; the impact is broad – and creates opportunities for developed-world companies as much as local ones.
“We are quite a small team of 13 investment professionals organised into global sector specialisms for information-gathering,” says Ms Winther. “But we all sit together and exchange this information so that when we go back to our desks, even though I am personally looking at industrials, I will have facts in my mind about pharma, banks, and so on, along with all the investment themes, which helps me to think about how the companies I cover might benefit from them.”
