Thematic investing depends on change, it captures change and it exploits the power of change. The mo...
Thematic investing depends on change, it captures change and it exploits the power of change. The most important aspect of thematic investing lies in understanding this change and translating it into a coherent investment strategy.
Themes tend to have the following characteristics:
• They are forward looking.
• They are global; transcending countries, sectors and industries.
• They often display little correlation with one another.
We believe that theme selection rather than country or sector selection will soon be recognised as the most important decision to make. Managing the thematic 'life cycle' in the context of the global economic environment is a crucial part of this process. Themes are born and they die and sometimes they evolve into something quite different; something that retains many of the original characteristics but with enhancements that ensure it remains appropriate for the prevailing economic environment.
The last few years have seen an extraordinary effort by the world's politicians and central bankers to stave off deflation. Interest rates were cut to 1% in the US, 2% in Europe and 4% in the UK - multi-decade lows in each case - while Japan found it necessary to maintain rates at zero. Government surpluses became government deficits, while consumers took advantage of the ultra-low interest rates to refinance their mortgages and raise debt.
While the improvement in the US labour market appears to have stalled, a degree of economic growth is probably now sustainable. This, inevitably, has implications for investment themes, but what are the implications and how should investors respond?
In our case, we made three significant changes to our global thematic portfolios. First, it was clear that our 'survival of the fittest' theme, in which we favoured financially strong companies in distressed sectors, had run its course. A tremendous theme for much of the last two years, economic growth and strong cash flow had allowed even the weakest of companies to repair their balance sheets. Indeed, the risk of corporate failure had lessened to the extent that there was little competitive advantage to be had from a strong balance sheet.
It was also necessary to change the focus of our 'profiting from deflation' theme and to rename it 'cash flow opportunities'. The theme continues to acknowledge the value of superior cash flow - allowing companies to raise dividends, buy back equity or grow their businesses - but it also recognises that the days of excess liquidity are over. As a result, the future focus of the theme will be towards growing cash flow rather than asset reflation.
Finally, against a background of intense competition and rapid price commoditisation, we believe that a company's ability to develop and deliver genuinely innovative products to the marketplace would determine tomorrow's 'winners'. Further, with the WTO putting more and more pressure on the emerging world (including its new member, China) to respect patents and intellectual property, the most effective innovators should be more able to commercialise their R&D.
Our new theme, 'intellectual property and innovation,' is designed to capture the shareholder value generated by superior product innovation. We believe it is possible to identify companies that consistently outperform competitors in terms of commercialising their intellectual property and delivering innovative products to the market.
While themes are typically long-term, it is important to have an active and dynamic theme origination process. The above changes are a direct consequence of the recent volatility in global economies and while we are confident that these themes are in tune with today's global economy, we will stay vigilant to ensure they remain so.
To conclude, the world consists of thousands of companies each working towards their own goals and all, to a greater or lesser extent, seeking to generate value for shareholders and employees alike. Some find themselves swimming against a strong tide of global competition, pricing pressure and technological change. Others find themselves burdened with a management team that is unable or unwilling to acknowledge the speed at which its marketplace is changing. Some, however, are at the 'sweet spot' of the corporate landscape enjoying a proactive, shareholder-friendly management team and a business model that is not only appropriate for the new millennium but goes some way towards shaping it.
Just as companies evolve, so too must the fund management industry. Theme selection will increasingly be recognised as the most important decision to make. Superior performance will come to those that can identify the major themes and the companies most likely to benefit from them.
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till