Thematic investing could be a clever way to spot the next big investment opportunity. Rob Griffin spoke to the experts to find out how we can spot areas with big growth potential.
No-one can predict the future, although investing in firms that may benefit from exciting trends may improve your chances of success (and possibly decent returns).
The good news is there are plenty of innovative businesses poised to take advantage of key themes within the technology, healthcare and finance sectors.
Keeping an eye on tomorrow’s potential winners is a sensible strategy for all investors advises Patrick Connolly, head of communications at Chase de Vere.
“The world is constantly changing,” Connolly says.
“As a result, the types of companies which will be the most successful in the future also constantly changes.”
So where should you focus your attention? We quizzed a few fund managers to find out the hottest areas that are worth considering.
Almost everything we do is being improved by technology. Can you imagine life without your smartphone? It doesn’t bear thinking about.
The current growth of technology is comparable only to the invention of the internet, says Richard Lightbound, chief executive officer of EMEA & Asia at advisory company ROBO Global.
“As the power and speed of computing continue to accelerate, myriad new technologies and applications that were previously out of reach are suddenly becoming a reality,” comments Lightbound.
Developments in mobile phones are a prime example, according to Denny Fish, co-manager of the global technology strategy at Janus Henderson Investors.
“Although 5G is in its infancy, it’s quickly becoming a major factor in technology as 5G connections are 100 times faster than 4G,” says Fish.
There is also the gaming sector, which is now bigger than the music and videos sectors combined, according to the Entertainment Retailers Association (ERA).
Games accounted for more than half of the entire UK entertainment market (51.3%) during 2018, with millions of people playing.
The sector has benefitted from lots of new services, such as direct to console downloads, according to Kim Bayley, chief executive officer at ERA.
“The games industry has been incredibly effective in taking advantage of the potential of digital technology to offer new and compelling forms of entertainment,” says Bayley.
“Despite being the youngest of our three sectors, it is now by far the biggest.”
Jamie Mills O’Brien, investment analyst on the Aberdeen Standard SICAV I – European Equity (ex-UK) Fund, sees plenty of opportunities in this space.
“We own a company, Ubisoft, that is investing behind a number of growth trends, including mobile gaming and the evolution of new game engines to the cloud,” he explains.
Robotics and artificial intelligence
Driverless cars are no longer the preserve of sci-fi fantasy.
While there are still plenty of issues to be ironed out, driverless cars are likely to become a commonplace reality over the coming years.
Greg Tuorto, manager of JP Morgan US Technology fund, suggests investors are shying away from artificial intelligence as they believe it’s at too early a stage to enjoy long term success.
“We disagree - and find many ways to invest in the theme across a curve of innovation and disruption,” comments Tuorto.
He expects to see continuous development.
“Further down the road there will also be investable opportunities in autonomous cars and machines as well as virtual and augmented reality.”
Machines will revolutionise the jobs market according to a study by the World Economic Forum, in which they will take over 75 million current positions – but create 133 million new roles.
Its report, entitled ‘The Future of Jobs 2018’, forecasts a seismic shift in the way we work, with only half of today’s core jobs expected to remain somewhat stable up to 2022.
Simon Webber, lead manager of the Schroder ISF Global Climate Change Equity fund, believes people are underestimating the importance of acting to combat climate change.
“Lots of countries and cities are putting in place zero carbon policies,’ he says.
“The scale of change coming that’s necessary to deal with climate change is going to be huge.”
He predicts new companies will be created and notes technological developments have the backing of governments around the world.
Pascal Dudle, manager of Vontobel Fund Clean Technology, argues companies that offer solutions to global challenges will be rewarded with higher market shares.
“They are also less exposed to tighter regulation than competitors that don’t offer such products,” says Dudle.
“These factors should ultimately boost the shares of these companies.”
Dudle believes the six most promising areas for investors are: clean water, smart buildings, future mobility, clean energy, resource-efficient industries, and recycling and waste management.
Andy Acker, who manages the global life sciences and biotechnology strategies at Janus Henderson Investors, focuses on companies that are trying to make healthcare delivery more efficient.
“The most prominent themes include developments in oncology, cardiovascular disease, diabetes and genetic diseases, as well as gene therapy and cell therapy,” he says.
The extraordinary pace of innovation in healthcare means there are plenty of opportunities, according to Vinay Thapar, manager of AllianceBernstein International Healthcare fund.
“I believe we will see blood tests that can predict the risk of cancer,” says Thapar.
“If this can be determined as easily as cholesterol, it could save on surgical procedures and hospital stays.”
The key theme in the finance sector is the gradual move towards a cashless society, says Vasco Moreno portfolio manager of BlackRock World Financials fund.
“The fund seeks to capitalise on technology disruption within the finance industry by investing in areas such as payments, banking, investments, insurance and software,” he explains.
Moreno insists customers are demanding better, cheaper and more convenient financial products and services.
The key to success, he suggests, will be the ability to adapt to changing requirements.
“The tech-enabled challenger banks should be able to gain market share and change the shape of the industry in the long term.”
The finance sector still has plenty of growth potential as the speed of change differs between countries, argues Jeroen van Oerle, co-manager of Robeco Global FinTech Equities.
“In the Netherlands and Scandinavian countries, cash usage is less than 25%, but in countries like Germany, Italy, Spain, Greece, cash is still 50% to 80% of all payments,” he says.
Safety and security
The rise in technology is being matched by an uptick in safety and standards.
While this presents challenges, it does offer some investment opportunities.
According to Patrick Kolb, who is responsible for the Credit Suisse Global Security Equity fund, governments and companies must adhere to mandatory quality and safety standards.
“Innovations such as robotics and breakthroughs in medical treatments require more novel security and safety solutions,” he says.
There is also the need to establish stricter regulations surrounding quality standards for our environment, particularly around health, food and water.
How to get exposure
So, you know which areas are being tipped for greatness, but how can you buy into the companies that are likely to benefit?
There are a number of ways.
The first is to buy shares in companies that are quoted on one of the world’s stock exchanges.
The benefit of this approach is that you’ll get undiluted exposure to successful companies – but the downside is the stock could fall drastically in value and you could lose all your money.
The second option is to invest in a fund that specialises in your desired theme. These types of portfolios have been launched at an alarming rate in recent years, so you may be spoilt for choice.
While this is less risky than buying individual names, this still means having a lot of eggs in one basket.
If there’s a problem in the overall sector you're invested in, your investment may be negatively impacted.
Below are a few funds (or exchange-traded funds) that focus on these sectors:
- Technology: Neptune Global Technology, AXA Framlington Global Technology, Polar Capital Global Technology;
- Robotics/AI: Robo Global Robotics and Automation Index ETF, Pictet Robotics;
- Environmental: Impax Environmental Markets Trust;
- Healthcare: Polar Capital Biotechnology, BB Healthcare;
- Finance: Framlington FinTech Fund;
- Security: Pictet-Security.
You should note these are not investment recommendations or a comprehensive list of available UK funds.
You should conduct your own research to make sure your desired fund meets your investment strategy and risk profile.
The final option is to choose a fund that embraces a number of global themes, such as Pictet-Global Megatrend Selection.
Regardless of which option you favour, take your time to look at potential stocks and funds.
Do your research, check out the fees involved and look at the past track record of the fund managers.
A word of warning
Of course, there are no guarantees of success in the world of investing.
The global themes may look attractive but there’s no guarantee that companies operating in these sectors will be profitable.
Themes can be called wrong and the investment opportunity can sometimes never materialise, points out Adrian Lowcock, head of personal investing at Willis Owen.
He suggests having a moderate exposure to trends.
“Thematic investing sounds great. It is easy to understand big concepts, but it can be much harder to turn into reality and predict what the outcome may be,” he warns.
Be the first to comment
Do you want to comment on this article? You need to be signed in for this feature