In a ‘bigger is better’ world, it is no longer enough for economists and asset managers to talk about trends. Instead, they talk about ‘megatrends’ – massive global changes that transcend physical, geopolitical and cultural boundaries.
In theory, these massive global shifts, such as an aging population and changing climate, should yield a rich harvest for investors. After all, if we all eat less meat, vegan burger companies should be thriving, and hip replacement businesses should be the foundation of your portfolio as we all get older, right?
But thematic investing, as fund managers tend to refer to the strategy of choosing companies that can experience this wave of global change, is harder than it looks. We don’t have a crystal ball and seismic events, such as a global pandemic, can throw predictions off balance.
Looking to the future: we don’t have a crystal ball and seismic events, such as a global pandemic, could throw predictions off balance
As a result, special thematic funds aimed at catching megatrends can be a risky purchase. “It’s an exciting area, but investors need to make sure they have their most important foundation first,” said Laith Khalaf, financial analyst at asset manager AJ Bell. “Thematic funds are specialist and high risk, so should only be used by experienced investors looking to expand already well-diversified portfolios.”
However, if we are investing for the long term, it is good to choose our mutual funds and stocks in view of how the world is changing, whether we invest in specific thematic funds or not.
As we move out of lockdown into a post-pandemic future, Wealth asked investment experts what thematic trends have been impacted by Covid-19 – and where the next investment opportunities might lie.
INCREASE YOUR PROFIT WHEN ROBOTS COSTS REDUCED
It’s hard to ignore the huge advances in technology use that have been made since the start of the pandemic. Walter Price, who manages the investment fund Allianz Technology, says that while technology use increased in all aspects of business before Covid-19, “the slope of the curve has increased dramatically since then.”
While stocks in companies like Facebook and Amazon have risen in value thanks to our increased reliance on them, experts believe there is value to be found in other areas of the technology sector.
Jason Hollands, director of asset manager Tilney, is enthusiastic about robotics and automation – developments accelerated by the pandemic. He says problems with global supply chains during lockdowns mean we will produce more at home, using robots rather than manpower.
He explains: ‘The pandemic has exposed the risks of relying heavily on global supply chains, whether it’s to secure supplies of PPE, fight over vaccines and other bottlenecks.
“Combined with the desire to reduce travel to reduce CO2 emissions, you can expect much more production previously outsourced to low-cost producers such as China to move closer to home where robotics and advanced machinery can be used to the production costs.’
AJ Bell’s Khalaf agrees. He says automation is a key trend in technology, suggesting investors looking to get exposed to it should look to the publicly traded fund iShares Automation and Robotics.
The top positions include the American company Teradyne, which makes robots. Bhanu Bhaweja, the chief strategist at investment bank UBS, is enthusiastic about a shift from ‘brick and mortar’ to software, e-commerce, the cloud and intellectual economy’.
James Carthew, an analyst at QuotedData, a mutual fund research firm, says the rise of cloud computing is enabling smaller software companies to attract lower-cost customers.
He suggests smaller companies are confident that Herald, run by veteran fund manager Katie Potts, is a good way for investors to take advantage of this trend.
CASH IN ON THE RACE TO NET ZERO CARBON
Another obvious megatrend is the shift to net zero carbon, which is already impacting the investment landscape.
“This megatrend was already brewing before Covid,” said Darius McDermott, director of investment fund expert Chelsea Financial Services. “People had finally woken up to the fact that we can’t continue to abuse our planet – we knew it would take $2.4 trillion in annual spending to meet the global temperature targets. But the solutions have been accelerated by Covid as governments around the world have pledged to restore their economies better and greener.” McDermott says one reason to invest sustainably now is that these solutions are enthusiastically supported worldwide. “We have a rare time when regulation supports an investment trend,” he adds.
Carlos Hardenberg is co-manager of Mobius, an investment fund for emerging markets. He says there is “unprecedented pressure towards alternative energy sources – from hydrogen fuel cells to wind and solar-based solutions with a gradual end to fossil fuel-based energy supply.” He adds: “This will have a broad impact on the industrial landscape with new technologies supporting this transformation.”
One way to access this climate-driven megatrend is through the Ninety One Global Environment themed fund. McDermott says, “It only invests in companies that are decarbonising the global economy.” Top funds include US environmental services company Waste Management and US electric utility Nextera Energy.
Khalaf from AJ Bell suggests the Liontrust Sustainable Future Global Growth fund, run by Peter Michaelis, as a good choice for those looking to gain exposure to the theme of sustainability. The fund has interests in Alphabet and Visa, as well as in Spanish mobile phone infrastructure specialist Cellnex.
Khalaf adds, “There are more specific sustainable themes that investors can focus on if they wish, but these carry a higher investment risk because they usually focus on only part of the overall environmental theme.”
For example, Greencoat UK Wind is an investment fund that invests in wind farms across the UK. Investors choosing such specialized investments should ensure that they are only a small part of an otherwise diversified portfolio.
THE REWARDS OF AN AGING POPULATION
Even as the pandemic eases, health fears will undoubtedly remain, as will the need for investment in national health systems. Of course, the rapidly aging world population needs more health care, and since the elderly own much of the world’s wealth, they will be willing to pay for solutions. “Before the pandemic, health care was already an area where investment was needed and the spotlight that was on it last year has made that even more so,” said Chelsea’s McDermott. ‘In developed economies, aging means that governments must be able to treat more people for less money.’
James Douglas, fund manager of investment fund Polar Capital Global Healthcare, believes there will be substantial growth in areas such as telemedicine and home healthcare technology, such as monitoring systems.
He says: ‘The healthcare sector wants to move the number of patients to cheaper and more convenient environments such as at home. In a post-Covid 19 world, there is an expectation that healthcare systems worldwide will invest in analytics and technologies to drive cost savings. That should enable a wider range of care without jeopardizing the quality of care and outcomes.’
Fund choices to take advantage of this thematic trend range from iShares Aging Population (a fund that invests in a basket of stocks benefiting from an aging demographic) to Worldwide Healthcare Trust.
Dzmitry Lipski, head of fund research at asset manager Interactive Investor, is a fan of Worldwide Healthcare, which is managed by healthcare investment specialist OrbiMed Capital.
He says, “It has generated a 108 percent return over the past five years and has outperformed its peer group.”
TRY MULTI-FUNDS FOR MEG TRENDS
Some mutual funds invest in a portfolio of stocks that embrace these megatrends.
This includes Montanaro Better World, which invests in companies that focus on themes such as healthcare, the green economy and innovative technology.
Also M&G Global Listed Infrastructure which invests in economic, social and ‘evolving’ infrastructure.
Chelsea’s McDermott says: ‘This means the fund can invest in everything from utilities and toll roads to renewable energy, healthcare, education and civil buildings, as well as cell towers, data centers, payment companies and royalties.’
EVEN PORTFOLIOS CAN GO VEGAN
While the megatrends described above may seem dauntingly large, some experts are urging us to consider incorporating a smaller thematic trend—diet change—into our investment decisions.
Keith Bowman, an analyst at Interactive Investor, says investments in plant-based foods are “huge.” He adds: ‘Last November, Unilever announced a new annual global sales target of €1 billion of plant-based meat and dairy alternatives within the next five to seven years. Vegan alternatives to some of its brands – including Hellmann’s, Magnum and Wall’s – are eagerly pursued.” McDermott of Chelsea Financial says that this plant-based trend is indispensable. He says: ‘As the world’s population grows and middle classes settle in different countries, eating habits will change. From an environmental point of view, we really don’t want any more meat eaters, so plant-based eating is becoming the norm rather than the exception.’
Mutual funds operating in this area include Pictet Nutrition and Sarasin Food and Agriculture Opportunities.
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