Where do you draw the line between thematic investing and ESG investing?
Frédéric Dupraz: “The quick answer to that is that at Thematics AM we don’t necessarily believe that a line needs to be drawn between the worlds of thematic investing and ESG investing. As strong believers in secular themes that are shaping the world of tomorrow, adopting a sustainable and responsible approach fully subscribes to our thinking. Increased urbanization, demographics, digitalization, rising living standards in addition to the necessity to adapt to climate change all present investors with opportunities to benefit from new areas of growth. These are some of the long-term structural shifts that we see today and that we anticipate will continue to change the way we live and work in the future. When considering a long term investment horizon it is essential to also consider environmental, social and governance factors that are likely to impact a company’s risk profile, the obvious reason being the longer the time horizon the more likely it is for those risks to materialize over time. We also believe that ESG integration leads to better informed investment decisions, helps mitigate portfolio risk and supports long term value creation for asset owners.
What is the impact of the current crisis on the safety strategy?
FD: Within the current context of a global pandemic, safety considerations have become all the more obvious, impacting the way we think, interact and live our daily lives. The combination of certain primary forces at work, such as demographics (with rapidly growing populations) and globalization (with increasing collective mobility) can lead to augmenting health risk factors and therefore create ever increasing safety preservation requirements. That situation cannot be better embodied than by the crisis we are experiencing today around the Corona virus spread. The crisis has reinforced the necessity for greater health controls which will no doubt benefit our ‘Eat’ segment over the long term. Confinement will also impact our way of working and will accelerate remote working and a rethinking of IT infrastructure more generally. It could also favor e-commerce and m-commerce operators, i.e. our ‘Shop’ segment. Events such as the Corona virus and other forms of natural catastrophes act as a wake up call for governments and businesses that need to ensure rapid and efficient communications with populations during times of crisis. Firms that provide communication solutions during these types of events such as Everbridge will also likely benefit.
How can investors benefit from thematic investing?
FD: “With an abundance of research, data and opinions at our fingertips in today’s fast-paced world, it’s easy to fall into the trap of always trying to locate the best tactics, strategies or securities to buy right now. At best, this is a patchwork system that is sure to fail. Without an overarching philosophy to bring it all together, one would just be chasing one investment fad to the next, losing money along the way. Therefore, we use a thematic lens to look at the world in our quest to generate sustainable risk-adjusted excess returns over the long-term. By way of illustration we have designed an investment approach that focuses on safety. This may seem a broad concept, but a number of specific themes lead to focused investment opportunities that provide resilient long-term growth opportunities. Increasing urbanization with a global urban population that is expected to grow 44% by 2050, can create vulnerabilities that need to be addressed within the context of large concentrated populations. As mentioned previously climate change will also put cities increasingly at risk, with flooding, water contamination, the potential spread of viruses and infrastructure collapse among a range of possible risks. Another theme is digitalization with the rapid development of new technologies opens huge areas of vulnerability. Likewise increasing government oversight in the form of regulation in all areas of the economy presents an investment opportunity. Regulation of food, the environment, the automotive segment, workers and road safety, as well as product quality and safety compliance, not to mention data and privacy are all examples of growing areas of oversight and the need for compliance through testing and investment.
What is your specific approach to portfolio construction?
FD : “our fundamental and bottom-up stock selection process is benchmark agnostic, as we think a forward-looking portfolio is best suited to identifying profitable, well-capitalised companies in the global Safety value chain that benefit directly from long-term secular trends. Our portfolio also cuts across traditional classifications, be they geographical, sectoral or market capitalization considerations. As a result, our portfolio has a low overlap and a high active share in relation to global equity indexes, therefore adding diversification to an existing global equity exposure. Our portfolio construction approach is guided by a disciplined and repeatable process: firstly we qualify our thematic investment universe and quantify associated secular growth opportunities, then the focus turns to idea generation and security selection and last but not least we dedicate our time to position sizing and company engagement. Position sizing is mainly driven by risk-reward and encompasses considerations such as business quality, valuation assessment and ESG and trading risk factors.