The notion of thematic investing has risen in popularity recently and is often associated with the technology sector and disruption. Investing successfully in this manner has been deemed as simple as picking a winning theme. Yet what thematic investing is, and the role it plays in a multi asset portfolio, is much more complex.
Thematic investing isn’t just about gaining exposure to a broad area such as technology or renewables; there will be winners and losers here just as there is in everyday investing.
Rather, thematic investing is concerned with identifying structural forces of change that evolve independently of the economic cycle; discerning those companies positively exposed to this change, that can harness it for their benefit, and have a sustainable and defensible competitive advantage.
At ANZ Private, we believe that truly transformational shifts tend to unfold at a non-linear pace, often surprising markets. Having exposure to these structural trends may benefit investors if the change plays out as expected.
Fit for purpose
The longer-term nature of thematic investing typically fits well within a high net worth (HNW) portfolio.
For long-term investors, thematics may provide a method for hedging against long-term risks like the effects of the energy transition or labour replacement through robotics and artificial intelligence (AI). In the case of Australian investors, these risks may be more acute given the traditional home bias towards a small and narrow equity market – one where future returns may be less favourable than in the past.
The aim of thematic investing is to capture sources of return that are not well represented in traditional portfolios where mean reversion and the influences of the business cycle tend to dominate.
However, any thematic exposure should be considered in the context of an investor’s total multi-asset portfolio, rather than simply a standalone investment opportunity.
While thematics can add further diversification to a portfolio, investors must remain cognisant of the exposure they hold to sectors, geographies, and factors – just as they would in any other part of their portfolio.
Furthermore, as these structural themes evolve, they typically tend to increasingly interact with one another – ageing populations, the adoption of AI across healthcare and an increasing dominance of fiscal policy is one such example. Given this, investing in one or even multiple themes can leave investors exposed to idiosyncratic risks.
Investors should seek the use of fundamental and quantitative tools to help identify and manage these interactions with the aim of constructing a portfolio of multiple themes with differentiated and diversified return streams.
Investors can access thematic investment opportunities through a range of implementation options, each with their own merits and risks.
Exchange-Traded Funds (ETFs) allow you to target preferred themes while efficiently diversifying within that theme. On the other hand, an actively managed fund uses the skill of a professional manager to navigate a range of themes and to target businesses within each theme as they evolve.
The other way to gain exposure to a given theme is via private markets; the less liquid nature of these markets is typically aligned to the capital requirements of companies that are undertaking longer-term infrastructure projects, including some of those commonly associated with sustainability.
Through private markets, investors can access a risk-premium from those companies seeking capital, free from the vagaries of short-term reporting in public markets and the potential issue of investor redemptions.
Previously, private market opportunities were primarily accessible by pension funds and institutional investors. However, as more capital is required to drive these longer term thematics and given the increasingly integrated role they play in global finance, asset managers have had to find ways to make these opportunities more accessible for investors.
This democratisation of private markets should benefit those HNW investors looking to build higher allocations to illiquid assets to try and meet risk and return objectives across multi-asset portfolios over the coming decades.
ANZ Private has identified four broad themes we expect to play out over the longer-term in society and investment portfolios by extension – People and Demographics, Disruptive Technology, and the Physical World. A fourth – Economic Forces – has already begun to accelerate post pandemic as the removal of easy monetary policy, the end of the low-inflation era and a shift towards deglobalisation reshapes labour markets, global supply chains and human behaviour.
These structural themes are expected to provide unique opportunities for investors over the coming decade.
Summary of themes
People and Demographics
This theme was covered extensively at our Client Insights series earlier this year.
It focuses on the major structural shifts expected to occur across the global economy as populations and societal compositions drastically change.
This includes slowing global population growth and a rising median age that will help some countries, while rapidly ageing and contracting populations weigh on many developed economies.
It incorporates the changes in migration and the growing importance of the “grey” economy including attempts to narrow life and health expectancy through developments in healthcare.
Moreover, it covers the adaption of education, infrastructure and societal norms as the needs and expectations of a more urbanised, connected, and vastly expanded global middle class rise to prominence.
In 2023, we’ve already witnessed first-hand the power of disruptive and emerging technology.
The AI euphoria saw the rise of the ‘Magnificent Seven’ – the seven largest US mega-cap stocks exposed to the tailwinds of AI. Investors rushed to participate in lofty gains, corporates questioned how best to incorporate this technology and governments scrambled to establish regulatory protocols.
However, AI is only a fraction of disruptive technology theme. Over the coming decades, the pace and reach of technological developments will increase, transforming human experiences and capabilities while creating new tensions and disruptions.
Technologies, such as AI, high-speed communications, and biotechnology, are expected to be augmented by an increased understanding of social and behavioural sciences. This enhancement should enable quickfire breakthroughs and user customised applications that are far more than the sum of their parts, with spin off technologies and applications enabling faster adoption.
Indeed, the convergence of seemingly unrelated areas of technology are already making the rapid development of novel applications possible, practical, and useful and this will only accelerate in the years ahead.
Disruptive technology is one of the most prominent discussion points in today’s society and is likely to occupy significant regulation, capital and resourcing in the years ahead. This is the megatrend most commonly associated with thematic investing.
The Physical World
Resource scarcity and climate change are expected to increasingly exacerbate risks to human and national security, forcing states to make hard choices and trade-offs.
The burdens are likely to be unevenly distributed and should heighten competition, contribute to instability, strain military readiness, and encourage political movements.
Decarbonisation and the energy transition will require significant capital and may crowd out research and resources elsewhere. Land degradation and water misuse will likely intensify resource scarcity issues.
Exposure to this theme and its myriad of sub-segments is one that many investors with a preference for sustainable and impact investing are already looking to incorporate into their portfolios.
The international system is transitioning from a unipolar to multipolar world. The US and China are likely to increasingly compete for influence and control of institutions. This competition may drive fragmentation into global trading and security blocs that control information flows within separate cyber-sovereign enclaves, while supply chains may be reoriented, and international trade disrupted.
The share of income to labour faces changing dynamics and is expected to impact, amongst other things, wealth disparity, labour shortages, labour replacement through automation, AI and cross border labour mobility.
Excessive debt burdens are likely to restrict growth while deleveraging and quantitative tightening is applied. Indeed, the nature of policy development to manage economic growth has seen a growing reliance on fiscal rather than monetary policy, and this is expected to have an impact on the investing environment and the creation of wealth in the period ahead.
Possibly the broadest of our four themes, this is one that is incorporated extensively across many funds and portfolios.
Discover how ANZ Private can help
At ANZ Private, we believe diversification, professional portfolio management and a long-term investment strategy are critical to growing wealth.
Thematic investing options are a growing part of the investment market. Predicting such change and timing investments in these areas can be difficult. As such, in addition to identifying possible opportunities, our focus is to prepare portfolios for change rather than predict when and at what magnitude they will occur. Having a diverse exposure to multiple sources of return should allow portfolios to remain invested through these inflection points – regardless of outcome.
To find out more about how we may be able to assist you with your investment and advice needs please speak to your ANZ Private Banker or Advisor.
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