Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 302

Thematic exposure to global trends using ASX

Good share market returns require identifying companies likely to produce healthy earnings and dividends over time. Investors traditionally have had the choice of active managers attempting to pick winners, or passive managers taking a rules-based approach, such as investing in companies that meet criteria relating to price momentum, valuations or financial metrics, or the overall index.

The problem with many of these approaches is that the choice can be governed by short-run – or cyclical – dynamics. Deciding which part of the cycle we’re in, and which companies will do well in that part of the cycle, is no easy task.

Thematic investing offers an alternative approach, embracing the cost and diversification benefits of passive investing but with a rules-based strategy to identify companies with the potential to benefit from predictable, longer-run structural changes.

What is thematic investing?

The goal of thematic investing is to identify megatrends and enduring structural forces that will affect the economy over time, and then position one’s portfolio to benefit from those forces, irrespective of the ups and downs of current or future economic cycles.

The table below summarises the differences between thematic investing and approaches relying on identifying and positioning for short-run economic cycles.


Thematic or secular investingCyclical investing
Investment FocusMegatrends: disruptive technologies, demographic changesGeographic regions, sectors of the economy, factors such as momentum, value, quality, volatility
Type of change focused onStructuralCyclical
Investment horizonLong termShort-mid term
Timing considerationsEntry and exit timing less importantEntry and exit timing important
Illustrative size of portfolioSmaller universe of securitiesLarger universe of securities


Advantages of thematic investing

A primary benefit of longer-term investment approaches like thematic investing is that the timing of entry and exit points is typically less crucial than with more cyclically-sensitive investment strategies.

As seen in the table below, the rate of adoption of major technology changes over the past century – such as the telephone, electricity, cars and radio – has been measured in decades.  The pace of technological innovation is unrelenting, with more recent changes such as the internet, smart phones and social media just as disruptive, and take-up more rapid.

Adoption of technology in the US (1990 to the present)

Source: Asymco, BlackRock

Other megatrends likely to be sustained over coming decades include:

 

  • global population ageing

 

 

  • climate change and the demand for clean energy

 

 

  • Asia’s rising middle class

 

 

  • adoption of robotics, and

 

 

  • the increasing threat of cybercrime.

 

 

Thematic investing can improve portfolio diversification, as returns are likely to have low correlation to swings in major regional or sector investment benchmarks.

Thematic investing readily lends itself to a globally diversified passive approach – using rules to identify companies with revenue exposure to a secular trend, and then investing in a broad selection of the leading players anywhere in the world.

Of course, active managers are also able to take a thematic approach to investing. However, they are likely to face just as many challenges ‘picking winners’ from secular change as they currently do in picking winners from cyclical change.

One of the benefits of a passive market capitalisation indexing approach is that it tends to increase portfolio weightings to emerging ‘winners’ with rising market cap over time, while cutting exposure to ‘losers’ with declining market cap. In dynamic forward-looking markets of the type that lend themselves to thematic investing, the market, on average, has demonstrated a tendency to get it right over time with prices (or market capitalisation) leading fundamentals such as actual revenues and earnings.

Thematic investing is an approach that resonates with investors, as it taps into economic changes they can see and hear taking place around them every day.  What’s more, many of these megatrends – such as environmental, social, or technology-focused themes – tap into an increasing interest in socially responsible investing.

Megatrend opportunities on the ASX

Thanks to the advent of exchange traded funds (ETFs), it has never been easier for investors to gain diversified, transparent and cost-effective exposure to these major investment themes shaping our world.

 

Don Hoang is an Assistant Portfolio Manager and Ilan Israelstam is Head of Strategy at BetaShares, a sponsor of Cuffelinks. BetaShares offers a wide range of thematic ETFs. This article is for general information purposes only and does not address the needs of any individual.

For more articles and papers from BetaShares, please click here.

 

RELATED ARTICLES

$100 billion! Five reasons investors are flocking to ETFs

Global ETFs: insights into a multi-trillion-dollar industry

Will ETF liquidity be there when I need it?

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Australia’s bounty: is it just diversified luck?

Increases in commodity prices have fuelled global inflation while benefiting commodities exporters like Australia. Oftentimes, booms lead to busts and investors need to get the timing right on pricing cycles to be successful.

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Latest Updates

Investment strategies

Five features of a fair performance fee, including a holiday

Most investors pay little attention to the performance fee on their fund but it can have a material impact on returns, especially if the structure is unfair. Check for these features and a coming fee holiday.

Interviews

Ned Bell on why there’s a generational step change underway

During market dislocation events, investors react irrationally and it should be a great environment for active management. The last few years have been an easy ride on tech stocks but it's now all about quality.  

SMSF strategies

Meg on SMSFs: Powers of attorney for your fund

Granting an enduring power of attorney is an important decision for the trustees of an SMSF. There are alternatives and protections to consider including who should perform this vital role and when.

Property

The great divergence: the evolution of the 'magnetic' workplace

The pandemic profoundly impacted the way we use real estate but in a post-pandemic environment, tenant preferences and behaviours are now providing more certainty to the outlook of our major real estate sectors.

Shares

Bank reporting season scorecard May 2022

A key feature of the May results for the banking sector was profits trending back to pre-Covid-19 levels, thanks to lower than expected unemployment and the growth in house prices.

Why gender diversity matters for investors

Companies with a boys’ club approach to leadership are a red flag for investors. On the other hand, companies that walk the talk on women in leadership roles perform better, potentially making them better investments. 

Economy

Is it all falling apart for central banks?

Central banks are unable to ignore the inflation in front of them, but underlying macro-economic conditions indicate that inflation may be transitory and the consequences of monetary tightening dangerous.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.