More investors buy into megatrends amid search for better yield

Singapore

INVESTORS are increasingly buying into funds and instruments that track opportunities based on long-term megatrends, in the hope of achieving better returns from paying heed to big structural themes that may also hedge against risks of a world that is increasingly becoming more insular.

Thematic investing involves looking at buying opportunities based on trends such as demographic changes, technological advancements, and climate change.

Credit Suisse's Asia Pacific investment strategist Julian Wee told The Business Times: "Thematic investing allows investors to keep apace with the sweeping societal changes, and are focused on structural driving forces and designed to transcend economic ups and downs."

Strategists have observed that investments focusing on megatrends have done well. For example, all five portfolios from Credit Suisse that focus on these so-called supertrends have generated positive absolute returns, said Mr Wee.

CPR AM, a subsidiary of Amundi Asset Management, told BT this month that its global thematics equities team now manages 10 billion euros (S$15.1 billion) under thematics investment, more than double the initial four billion euros when it was started just four years ago.

Ed Verstappen, the client portfolio manager of Dutch asset manager Robeco's global consumer trends strategy, told BT that interest in megatrend investing is growing as thematic funds are turning in better performances, whetting the appetite of other investors exploring this space.

Given the likelihood of weaker growth amid deglobalisation and trade tensions, there is a need to identify opportunities in areas that can grow faster than the broader economies overall, strategists said.

According to Hartmut Issel, head of APAC equities at UBS Global Wealth Management, this would mean that a long-term investment idea should "plausibly offer above GDP (gross domestic product) growth rates beyond one business cycle".

"A key difference is that thematic investing can add an element of flexibility by not being restricted to only looking at countries, regions or sectors," he told BT.

Indices have been created in recent times to capitalise on this trend. MSCI, which constructs indices, launched this month another five thematic indices, bringing its total offering in the megatrend investing space to nine. The new thematic indices can be used to design funds for investors focused on the rise of smart cities, the digital economy, future mobility, disruptive technology and millennials.

The Singapore Exchange this month said it would license its iEdge-FactSet Global Internet Index to Nikko Asset Management, which would in turn adopt the index for an exchange-traded fund.

As at May 31, Facebook takes up the lion's share of the Global Internet index with an 11.35 per cent weightage. Amazon, Google parent company Alphabet, as well as Chinese tech giants Tencent and Alibaba are also included.

Ideally, an investor may combine themes from different sectors to potentially achieve an above-average growth portfolio, strategists said.

UBS invests based on about 30 longer-term investment themes, in areas like retirement homes, agricultural yields, obesity, frontier markets, education services and healthtech, said Mr Issel.

Credit Suisse's approach is to offer diversification across sectors, regions and cyclicality, with around 25 to 40 single stocks per supertrend, said Mr Wee.

One such trend for Credit Suisse is the expected long-term growth in "edutainment" companies, which combine online education with the more entertaining features of the gaming world.

Population ageing has also attracted continued research and coverage. By 2050, the world's population aged 60 years and older is expected to total two billion, up from 900 million in 2015, said the World Health Organization.

Spotting megatrends does not equate to indiscriminate investing. Robeco's Mr Verstappen stressed the importance of stock picking, especially, where trends are still at the experimental stage.

In the case of self-driving cars, where sure-fire winners have yet to emerge, investors can instead look at manufacturers of sensors or batteries, as well as cybersecurity firms. These form part of the supply chain to the development of autonomous vehicles, he said.

Another key development that underpins megatrend or thematic investing is in sustainable investing, as analysts look beyond traditional financial metrics to assess investment opportunities based on environmental, social and governance criteria.

Mario Knoepfel, head of APAC sustainable investing advisory at UBS Global Wealth management, said returns on all strategies on this front are up double digits this year despite the challenging environment. They are also performing "well ahead" of benchmarks and more traditional strategies.

In response to increasing client demand for sustainable investments, UBS launched sustainable cross-asset portfolios for private clients in 2018 and this has attracted investments of more than US$600 million from clients in Asia, said Mr Knoepfel.

According to UBS, the interest in sustainable investing across the Asia-Pacific is widespread, with 85 per cent of Singapore investors interested in the concept of sustainable investing. Interest is particularly keen from women and younger investors.

Consumers, particularly, millennials, have also started to demand a more environmentally-friendly and ethical approach to business and investment, in areas ranging from food to transport systems.

"In this context, investors play an important role, whether they provide growth and seed capital for sustainable innovation in companies, buy stocks in companies that are at the forefront of change or use their voice as shareholders to help push companies in a more sustainable direction," said Credit Suisse's Mr Wee.