Thematic investing originates from the conviction that global mega trends or powerful seismic shifts which have a major impact on humankind give rise to winners and losers, like in a Darwinian process. The thematic investment approach, by anticipating change, aims to gain a long-term perspective on global financial markets and economies, and identify the beneficiaries of those changes, while avoiding risk. This forward-looking investment approach certainly appeals to wealthy individuals. Themes, such as those related to water scarcity or clean energy, are easy to understand and to explain, they often incorporate an ethical or responsible investing component, meeting investors’ increasing interest in this area.
“Thematic investments are all quite intuitive for clients to understand and their long-term bet is very clear,” says Paolo Molesini, chief executive officer at Intesa Sanpaolo Private Banking in Milan. Water, alternative energies, climate change and global demographics are the most successful themes at the Italian bank.
“Whether population in Europe or the States will be older in the future than it is today is an easy bet to win, beyond short-term volatility in the product. Ageing populations open up a new world of investment opportunities, where the goal is to identify those companies in various sectors such as healthcare, payment systems, communication, bespoke tourism, which are well positioned to benefit from this trend over the long-term.”
Ageing is indeed bound to have a huge impact on society, on consumer habits, demand, and on companies’ activity and financial performance. One of the recent product launches in this area is the Golden Age Fund by Lombard Odier. The combination of rising life expectancy and falling fertility rates is increasing the proportion of the world population over the age of 50. Baby boomers are gradually joining the over-60 age group and will dedicate a growing part of their income to remaining active and in good health. By 2050 it is believed that there will be over 2bn of these so called ‘golden-agers’, according to the Swiss bank.
As the typical total exposure of clients’ portfolios to themes is typically less than five per cent, it is essential to focus only on the themes that look solid and are most convincing, explains Mr Molesini. Thematic active funds are typically employed in the satellite part of a client’s portfolio and they are long term investments. Thematic certificates or structured products, which offer capital protection, also find their way into more risk-averse clients’ portfolios, improving asset diversification.
Thematic funds are pro-cyclical investments as they come back into the spotlight when markets are going up, notes Nicolas de Skowronski, head of investment advisory at Bank Julius Baer. “When investors want to gain some equity exposure, they look at these niche opportunities for diversification. But when markets are going down, asset protection becomes paramount and investment themes fall in the background.”
Today, investors still have a big proportion of cash in their portfolios and they are just starting building back some equity allocation. The initial step into equity is through global equity. Bric (Brazil, Russia, India, China) countries or Asia are one of the first building blocks investors are adding, says Mr de Skowronski.
Country, currency and sector allocation drive portfolio construction and even if water or clean energy are global themes, they are focused ideas and can be added just as satellite investments, he says. Active management is really important in this area, though increasingly there is more availability of thematic exchange traded funds (ETFs) and the Swiss bank offers both kinds of products to its clients in an open architecture approach, but ETFs are less popular, states Mr de Skowronski.
Julius Baer investment strategists currently favour the agriculture commodity theme, as it is thought to be more de-correlated from the market. The theme suggests that a growing population, changing dietary habits with increased meat consumption are generating increasing demand for soft commodities, while supply is negatively affected by climate change. There will be an exponential need for soft commodities and as a long-term theme is really worth investing in, he says.
However, over the last couple of months, clean energy has been the most popular theme amongst high net worth individuals, says Mr de Skowronski. Historically, the attractiveness of the theme has been inversely correlated to the level of oil prices. Generating clean energy is still more expensive than producing old energy, such as oil, so when the price of oil goes up, the price difference between producing new energy and old energy reduces, drawing investors’ interest in this area. “But from an investment perspective, people have to invest with a long-term view, not on the theme of the day.”
