Perspective - Watch/Listen
What is thematic investing and why should investors care?
Thematic funds focus on powerful, long-term global trends that are transforming the world and creating a wealth of investment opportunities.
10 September 2019
The power of human ingenuity is at the heart of thematic investing. This ingenuity ignites the innovation which solves imbalances in the world. In turn this creates growth which hasn’t yet been recognised in share prices.
By seeking out these opportunities, thematic funds offer a whole new way of investing, with the aim of achieving sustainable, long-term growth.
The world’s current imbalances might be between populations and resources, such as climate change. Or they might be within individual markets, where disruptors can appear and transform an entire industry by displacing long-established incumbents.
This interaction of ingenuity, innovation and the tackling of imbalances creates investment themes. These can be pervasive and compelling, such as climate change, urbanisation, disruption, energy transition and healthcare.
Ingenuity is embedded in who we are (and always has been)
Human ingenuity has defined us from ancient times, helping to transform the world and the way we think. This evolving process continues to this day and will prevail in the future.
The impact of inventions or discoveries made by ingenious individuals throughout history continues to be felt to this day. For example, Hippodamus, an ancient Greek philosopher, mathematician and architect who lived during the fifth century BC, is considered the originator of town planning. Hero of Alexandria, meanwhile, invented the world’s first vending machine (which dispensed holy water) in the first century AD.
The legendary Leonardo Da Vinci has been credited with a number of ideas and inventions in a diverse range of fields, such as engineering, mathematics and physics. Although some of his ideas (many of which were well ahead of their time) were wildly impractical, one of his inventions was a machine for testing the tensile strength of wire, a forerunner of today’s focus on smart materials.
Thomas Edison has been described as America’s greatest inventor. However, he can also be seen as one of the first disruptors in areas such as entertainment, with the development of the phonograph machine and motion pictures.
French-Polish scientist Marie Curie conducted pioneering work in the use of radiation to fight cancer, a battle which continues today using the latest developments in personalised medicine. More recently, Intel founder Gordon Moore devised Moore’s Law. In an indication of the pace of innovation, the law asserted that the number of transistors in a dense integrated circuit board doubles every two years. Finally, serial entrepreneur Elon Musk has been responsible for a number of technological advances in software and online payments, as well as the development of electric vehicles, solar power and artificial intelligence.
Just as Moore’s Law predicted the increased capability of semiconductors, new technologies are spearheading an acceleration in the pace of change in a range of sectors. The time taken for electricity to achieve 50 million users was 46 years. Television achieved the same feat in 22 years, while the internet took seven years. By comparison, social media site Facebook secured 50 million users in four years while for Pokémon Go, the augmented reality game played on smartphones, it was just 19 days.
Thematic investing is for the long term
Thematic investing is all about looking for opportunities. The interaction between ingenuity, innovation and imbalances creates sustainable, persistent and (most importantly) long-term investment themes. This in turn creates the opportunity to achieve long-term positive returns.
Themes such as climate change and the energy transition (the move from fossil fuels to clean renewable energy) are not only powerful, but will provide investors with longevity. The rise of global cities is also a long-term trend, with the majority of the world’s population expected to be city-dwellers by the end of the century.
In the energy transition, for example, the amount of investment that will be needed across the entire energy system will be huge. To fully achieve the transition, an estimated $120 trillion will need to be invested by 2050 in the areas of clean energy generation; energy storage; electric transport infrastructure; transmission and distribution; and smart-metering and demand response.
Sales of electric vehicles are set to increase in the next few years. Many countries have set targets for sales of new internal combustion engine vehicles to end. This is causing consumers to switch to more environmentally-friendly electric vehicles in a bid to limit the effects of climate change. The dates of these targets range from 2025 (just six years away) in Norway, to 2040 in the UK.
This will open up a huge range of opportunities for a number of companies, including auto makers and energy providers, but also companies supplying charging points and equipment for testing batteries.
Innovations are changing lives. Whether that’s scientists developing an artificial human heart or simply the ability to use your smartphone to watch TV or arrange your finances.
New companies are challenging existing ideas and disrupting established industries with radical new technologies.
This could be innovations in healthcare, where companies are trying to solve some of the big global demographic issues. Other companies are facing up to the challenge of climate change and urbanisation. Although new technology is disrupting the established order, this process is also opening up new opportunities for many companies.
Change is happening now and the pace of change is accelerating. These are no less than global transformations and they are opening up huge opportunities for thematic investing.
As with all investing, the value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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