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Investing by thematics rather than indexes

Investors are becoming increasingly frustrated at buying an index where they have little or no conviction around the thematics of some companies within the index. An example of this is owning the ASX200 which has companies that are in the gaming industry or in the business of selling alcohol.

Thematic investing will continue to build in Australia where investors follow themes or trends that resonate with them in a particular industry or sub-industry. It is already possible through more granular Exchange Traded Funds (ETFs) which are a low cost vehicle for investors to gain a thematic exposure.

Key thematics worth following

Some key themes that we follow include:

1. Changing consumer tastes

The internet has changed the buying patterns of consumers and enabled new retailers to emerge quickly and at a low cost compared with 20 years ago. Mobile connectivity has accelerated this even further. Based on some estimates, by 2020 there are expected to be over 40 billion devices connected to the internet. The majority of the growth is expected to come from emerging markets as internet penetration increases and consumer tastes change. This creates a huge opportunity – for example, one billion people in India conduct only 1% of their retail sales on-line. This is a huge opportunity for the likes of Apple, Google, Samsung, social media and telecommunication companies, cyber security companies and retailers such as Nike or other brands that can transition from high street to on-line without having to sacrifice margins. Some innovative ways to access this thematic is through the PureFunds ISE Mobile Payments ETF, the Global X Social Media ETF and the Emerging Markets Internet and Ecommerce ETF.

2. Energy and environmental awareness

China is currently dealing with the fallout from little to no environmental policies in the past and recent market moves have highlighted huge disruption as its manufacturing sector adjusts. It is working to find cleaner energy sources. Market estimates of an increase in energy consumption of 43% by 2040 would use an additional 40-50 million barrels per day. The world needs a new energy source to replace oil. Solutions are coming to market that could further improve and reshape the energy balance: cost curves for renewables are falling, solar is displaying profitable returns without subsidy, battery technology is improving and the cost of energy storage is declining. Winners are likely to be solar, nuclear and battery technologies that can produce a solution at a low enough cost to be adopted by industry. The iShares Clean Energy ETF or the Market Vectors Global Alternative Energy ETF provide a diversified exposure to this thematic including underlying exposures to Tesla Motors and Vestas Wind Systems.

3. Big data and cyber security

Big data, collecting and analysing client spending patterns is presenting huge opportunities in software. This is not new, but the tools to undertake the analysis are now more advanced, and improved storage and computing power have meant that no job is too big. Much of the development to date has been focused around building a big data strategy rather than spending the real money to implement it across the organisation. Accenture estimates that 73% of industrials are allocating 20% of their IT capex budget to big data. Credit Suisse estimates that applications across the industrial and consumer spectra could generate an estimated 10% compound annual growth in investment in big data to at least US$85 billion by 2026. The productivity gains to be harnessed as this is leveraged in industrial processes and automation are considerable, especially where the industrial ‘internet of things’ meets automation, robotics, additive manufacturing etc. The winners are the big players with a robust engine and scalable businesses such as Amazon, Microsoft, Oracle and cyber security. There has been significant growth in ETF’s that provide exposure to this thematic including the SPDR Morgan Stanley Technology ETF, First Trust Nasdaq CEA Cybersecurity ETF, First Trust Cloud Computing Index Fund and the PureFunds ISE Big Data ETF. This is probably one of the fastest growing areas in Global ETFs.

4. Aging population and maturing emerging markets.

People are living longer, in both developed and emerging markets. Healthcare is the big theme, looking after the elderly and sick. For companies that can effectively work with governments to improve the quality of life, and reduce the public burden, there are huge opportunities.

Environmental issues causing health problems in countries such as China and India are more endemic and ultimately there is heightened risk around regulatory or policy changes. Where ‘ageing’ is concerned, the two end markets that are most relevant typically lie across the healthcare supply chain and savings industry. A growth overlay to these end markets comes from emerging market, not just because of rising GDP per capita, but as the rate of ageing is now becoming more pronounced. It is now projected at twice that in developed markets out to 2035.

A therapeutic area of specific growth in healthcare is oncology and its related ‘immuno’ story, estimated as worth $35 billion in the end market. The challenge to healthcare generally is who pays the bills, and how? Winners are the big players that can implement broad solutions across geographies, and the hospital players who can provide low cost care and take the burden off the government. Accessing health thematics is not without pitfalls given that the risk of failure for a start up is very high. As a result, this thematic lends itself to investment through ETFs due to diversification across scale players. The SPDR S&P Biotech ETF and the SPDR S&P Pharmaceuticals ETF are two of the more established ETFs in this sector in the US, for an International flavour, the SPDR S&P International Health Care Sector ETF covers non-US companies.

Look for themes you are passionate about

These are just some examples of thematics that people can invest in for multiyear strategies, rather than chopping and changing looking for the next takeover. It is easy to see why this is a much more powerful investment proposition and most likely the way of future investing. Invest in something you know, a theme you are passionate about and stick with it because you will probably do better in the long run.

 

Michael Birch is Head of Equities at Mason Stevens Limited. These views are general and do not consider the personal circumstances of any investor.

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