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

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

Will ETF liquidity be there when I need it?

Profit from your principles

Most viewed in recent weeks

Retirees facing steep increases for basic items

ASFA has updated its tables on how much money is needed for a 'comfortable' or 'modest' lifestyle in retirement, but there are some prices rising well ahead of inflation.

Let’s stop calling them ‘bond proxies’

With cash and term deposit rates at all-time lows, and fixed interest bonds not much better, investors are looking for ‘bond proxies’ to deliver more income. But is ‘proxy’ a misnomer, and what are they anyway?

Adele Ferguson on ‘Banking Bad’ and weaving magic

The journalist most responsible for the calling of the Royal Commission takes care not to be roped in by everyone with a complaint to push. It takes experienced judgement to gather the right information.

Six warning bells against property spruikers

Property spruikers use common techniques, and con men will increasingly target older people who feel they do not have enough financial independence for their retirement years.

Helping your children build their super

It has become more difficult to build large superannuation balances with contribution caps and more people paying off home loans for longer. How can wealthy parents help their adult children?

Betashares

banner

Sponsors

Alliances

Special eBooks

Specially-selected collections of the best articles 

Read more

Earn CPD Hours

Accredited CPD hours reading Firstlinks

Read more

Pandora Archive

Firstlinks articles are collected in Pandora, Australia's national archive.

Read more