The Three "Whys"?
Frederic Dupraz, portfolio manager of the Thematics Safety fund, shares his vision of the fund's investment strategy.
There are good stories in every part of the safety value chain. The theme isn’t only about cyber security, it's also about automotive safety, food safety and personal safety. We can find excellent investment opportunities in almost every corner of the economy.
My first experience of the asset management industry was in 2006, following two years in wealth management. I then took over responsibility for a portfolio dedicated to the theme of ‘security’, which was a broad theme and relatively unknown at the time.
The lack of awareness meant that we had to continually explain the strategy to the market, and why security should be a top priority for every human being. We had to teach the market a different way of viewing security and safety. Then, as the market matured and the opportunity became better understood, investments soon followed.
I think this is a very attractive theme, given the broad range of companies that one can invest in. Opportunities range from service companies to very hi-tech cyber security businesses to automotive safety and pest control. As such, we have access to very varied range of business models from which to construct a diversified portfolio.
But I honestly wasn’t aware of the potential of a ‘safety’ product until about ten years ago. It’s only since we’ve seen rapidly advancing technological change that I think it's becoming vitally important. You only need to consider how our everyday activities are all secured by forces that are practically invisible, whether you think of travel, online shopping, energy production or social networking. These intangible resources underpin the framework of human safety in our world today.
This is why safety is a top priority for individuals, CEOs, heads of financial institutions and government leaders. And I think it will continue to be driven by urbanization, increasing regulatory oversight, innovation and globalization, because risks today don’t respect borders and can appear anywhere in the world in real-time.
Take the automotive industry: the safety content in a modern car has more than doubled in recent years and is likely to double again in the coming years with advancements in safety and driver assistance technologies.And security content is increasing across other verticals.
I’m primarily concerned with physical security – the real world. But I also cover cybersecurity and payment services. This is a broad remit across tech, digital and the real world.
However, there are good stories in every part of the safety value chain. The theme isn’t only about cyber security, it's also about automotive safety, food safety and personal safety. We can find excellent investment opportunities in almost every corner of the economy.
Inevitably, there are some things in common between the two strategies – especially when we talk about automotive safety. Autonomous vehicles are safer, but they are also autonomous - so we have some small overlaps in terms of in which strategy the company or sector should sit.
On the software side, too, we see the emergence of new cyber security companies that use artificial intelligence across their entire business model.
I know it's really hyped as a phrase, but with ESG you are investing in companies that will be here for the longer-term, so we integrate ESG into our process in a serious and considered way.
For us, thematic investing is not only about managing portfolios, it's about finding good companies and good ideas to invest in. I think we’re adding value because we differentiate between the companies that benefit from short-term hype - those concepts that won’t endure in the future - and we invest instead in companies that benefit from long-term secular growth drivers.
We have a unique selling point in that, as a team, we’ve been doing this for, on average, more than 10 years. We know the industry as well as anyone, so we know how to invest in this complicated space. We know the investment landscape inside-out, and there is a mutual respect among the members of the investment team regarding their convictions and what they know.
Europe is a natural market for us, and is the biggest market for thematic investing at present. Asia has good opportunities for penetration, because thematic investing is less well understood there, so part of our strategy is to try to target that region in the coming years. The US is the logical next step, because it's a market that has not really advanced on the thematic concept.
To be frank, we view the institutional market as more of a ‘long game’. Institutions tend to have less appetite for this kind of investment, despite our investment process being extremely robust. The challenge in that market is that, in a consultant-led environment, thematic investment strategies tend to be pigeon-holed as something they are not, which can make life more challenging. It must be said however, that at the margin we see certain consultants beginning to get their arms around what we do, which we feel could lead to some attractive opportunities in the coming years.
All of that said, we’ve seen some interesting prospects in the institutional space over the last five years or so, but this market remains a much harder sell – and has a longer sales cycle too.
At Thematics, we simply require ‘demonstrable market leadership’ from the relevant theme-linked service or technology, which affords us access to more companies with products in the high-growth, early phase of development. We have noticed that clients and prospects in the market have embraced this idea, trusting our team’s knowledge and focus, and welcome the broader and deeper investable universes that this approach gives us.
At the same time, they still understand that our strategies remain, and will always be, very highly exposed (or ‘pure’) in relation to their thematic boundaries. Our ability, due to this innovation, to access some so-called ‘lower-purity’, high-growth technologies has become a compelling differentiator for us relative to other established funds in the market, though we continue to stress that such opportunities will remain a small part of the strategies going forward.
In the meantime, we need to take care of performance, which, we are confident, will lead to asset growth. We are seeing the beginnings of this following some encouraging performance since the launch of our strategies. We have a target of $5 billion of AUM in the next few years which we feel is eminently achievable if we continue to perform well.