Thematics – A true source of diversification?

In the future, will everyone be investing in megatrends? And who benefits from shifts in demographics, innovation, globalisation and scarcity?

At a recent roundtable event to discuss thematic investing, we asked those present to think about what portfolios, might look like in 15 years' time. Simon Gottelier, portfolio manager at Thematics Asset Management, said, “I think that really sort of goes to the heart of thematic investing. When we look at thematic investments we have a safety fund, we have an AI & robotics fund, and we have a water fund. All of those strategies are driven by what we call, sort of, primary forces. So as Jens [Peers, of Mirova] said earlier, urbanisation and demographic changes, globalisation, innovation in technology, developments, and resource scarcity, all of these things are here to stay and are going to be drivers of economic change for the next 50 to 100 years. So, when we talk about the changes in portfolios in the next 15 years, it's with a very high degree of certainty, I think that I can say that thematic investing, whether you are actively getting involved in thematic funds or not, are going to be huge drivers, certainly of risk assets.”

Esty Dwek, of Natixis added, ”Some of these businesses, and water is a little specific but some of these other themes, whether you talk about AI & robotics, these businesses have changed the way we live, the way we behave. I think even if you look at some of the technology companies over the last few years, even when they've looked like a lot of the growth was already priced, we've continuously underestimated how much our behaviour as consumers has evolved and will continue to change.”

I think it's difficult to estimate ten years from now, you know, we're going to top the growth or we've already priced that in because we are changing. It's not just a business or a theme. I think we just keep underestimating how big of an impact some of these themes have had on our lives and will continue to do so.
Matthew Stanesby, investment director at Close Brothers Asset Management said, “I think the challenge for us is trying to marry the traditional TAA, SAA approach with thematics which is generally global and you then have to make sure that your client is understanding that if they’re buying a thematic fund, they're going to be in that for the longer term. I think that's where the problem arises because even the clients who say they've got a long-term time horizon, don't always have a long-term time horizon when things are not going well. So, it's a challenge and the challenge also becomes one of measurement and explaining how you're going to be measuring your portfolio. If you're not going to use a traditional index approach, you've then got to try to challenge how you're going to measure it. So, that's where we find difficulty and I think it's something that we're trying to grapple with and generally we'll use thematics where they are predominantly a global equity type replacement.”

Head of fund research at Thomas Miller Investments, Jordan Sriharan noted, “A lot of thematic funds, as well as ESG funds, some are saying, have got a higher amount of mid-cap growth type names on those portfolios. So, in your asset allocation traditional approach of regions, where you've got a US growth manager, an Asian growth manager, adding on these funds requires you to understand the style of buyers who you're affecting. So, it's not just a US versus Asia, versus tech story, it's actually, 'Are you compounding your portfolio and sort of giving it that mid-cap growth element that perhaps doesn't diversify it at all and ends up, you know, over correlating it?'.”

“I think SAA or traditional SAA has worked for a reason and will continue to.”, said Esty. “It's a great starting point. I think we try to invest for the long term. You try to have a long investment horizon and you need to have that starting point. You need to have objectives and maybe risk tolerances defined and that will help guide you throughout how you're moving.” “As my colleagues have been saying, more and more I think people are thinking longer term because we're in a current environment that has a lot of uncertainty. Not only thinking a few months out but even on a weekly basis. A lot of things can change. I think one of the points we're seeing is that a lot of our investors want to kind of move away from this short term uncertainty and look with more confidence to the future.”

“So, whether that's some of these megatrends and the thematics, whether it's responsible investing, whether it's really trying to pick those businesses or adding alternatives, all of those just are complements to your more traditional asset classes. So, it's not one or the other, it's one with the other, to help have this long-term diversification.”
All investing involves risk, including the risk of capital loss. This material is provided for informational purposes only and should not be construed as investment advice. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of Natixis Investment Managers and its affiliates as of July 2019. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecast, and actual results may vary.