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Betting on tomorrow's winners: thematic investing

Investors are moving from index to insight with thematic investing, in search of the big story in a low-growth world

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Investors are moving from index to insight with thematic investing, in search of the big story in a low-growth world.

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"What we have seen in the scientific arena is that essentially every 10 years, we add 2 to 2.5 years to the human lifespan." Dani Saurymper, lead portfolio manager for AXA WF Framlington Longevity Economy and AXA Framlington Health (UK Unit Trust).

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"We believe that passive investing is investing in the past, and indices are where they are because of what has happened historically. That isn't interesting to me. What's interesting to me is figuring out how a technological innovation is going to change the way the world works. I really believe we are allocating capital to its highest investment use." - ARK Invest CEO Catherine Wood.

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For Hamish Chamberlayne (left), head of sustainable responsible and impact investing at Janus Henderson, as long as the United Nations' sustainable development goals are not yet achieved, there is still room for more funds to join the bandwagon.

IMAGINE investing in a good story. A big story, tracing the arc of a megatrend - not just a cycle - that will propel those riding the wave far forward. That's what thematic investing is about: betting on the robotics revolution, rapid urbanisation, or the fact that many of today's incumbents will be heavily disrupted in the near future. And as with elsewhere, thematic investing has been gaining momentum in Singapore, especially for technology and disruptive innovation- related thematic funds.

According to Bloomberg, there are more than 39 thematic funds today that are available for purchase by both retail and accredited investors in Singapore. That's a stark increase from just two funds at the beginning of 2017. (The actual number of thematic funds is probably higher as some disruptive innovation, tech and demographicrelated thematic funds are not classified as such by Bloomberg.)

Are they outperformers? Thematic funds like to think of themselves as being able to beat the benchmarks, but iFAST Corporation unit trust analyst Shawn Teow observes that net of fees, the performance of thematic funds have mostly kept in line with the global equity benchmark MSCI AC World Index.


"What's key for actively managed strategies is that it allows investors to invest differently from the benchmark without necessarily compromising on performance," he says, while noting that undoubtedly, thematic funds have also been more volatile than passive global equity benchmarks.

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Essentially, thematic funds incorporate emerging trends and forward-looking perspectives into their investment strategies, as opposed to traditional benchmark or index investing, or the idea of investing according to sector, asset class, or geography.

As a result, thematic investing adopts a longer-term investment horizon than traditional frameworks. It zeroes in on structural trends stemming from environmental changes, technological advancements and demographic shifts over the long term.

In their pursuit of stocks with the highest odds of succeeding in the future, it is little wonder that newfangled technologies such as robotics, artificial intelligence (AI), and gene therapy are not uncommon constituents in thematic funds.

Mr Teow says the sheer increase in the number of MSCI indices and mutual funds dedicated to thematic investing over the past three years is testament that the strategy is here to stay. He believes that more of such funds will be launched, given the low-growth global environment, as these funds allow for secular growth opportunities that transcend business cycles and geographic regions. This can offer investors higher capital growth potential over the long term relative to their vanilla global equity unit trusts or passive Exchange-Traded Funds (ETFs).

Thematic investing also makes sense from both the retail investor's and asset manager's perspective, he adds. "Retail investors have often been guilty of earning below-average market returns, and this is largely due to behavioural factors, such as over-selling when markets are down.

"Thematic investing, which requires one to look far into the future, may be able to bridge the gap between investor and market returns, as it is framed as a long-term narrative to investors from the get-go.

"On the other hand, asset managers who are in the business of asset accumulation, are likely happier to manage monies from a stickier and more disciplined source of investor base. Most importantly, thematic investing is backed by strong structural tailwinds and these megatrends often provide a good and sound story that is difficult to argue against."

Another advantage that actively managed thematic unit trusts have over their ETF counterparts is the potential huge upside for investors, as the active manager can construct a portfolio of under-owned stocks across as wide a universe as they want, that have the potential to generate "abnormal returns".

Outsized returns, of course, come with higher risks, he warns, especially in themes such as biotech, AI and autonomous driving, as these companies do not guarantee success in their business models and may also be subject to regulatory hurdles.

Morningstar analysts Daniel Sotiroff and Alex Prineas also point out that thematic funds can charge considerably higher fees than their broad market counterparts and are less diversified. Evaluating their performance is also tricky, as the funds often have little or no performance history, and no direct peers or appropriate benchmarks to evaluate against.

They recommend investing in thematic funds as "satellites", rather than as a core portfolio holding, given that thematic funds typically invest in a much smaller basket of companies than the MSCI Index - and often in smaller companies too.

The Business Times takes a look at three such thematic funds in the market.


The disruptors of tomorrow

Nikko AM Ark Disruptive Innovation Fund

ARK Invest CEO Catherine Wood is probably best known for her conviction call last year that Tesla would one day trade at US$4,000 per share, which translates into a stock market value of US$720 billion. In a recent interview with BT, she says that her target price has now gone up to US$6,000 per share, but "no one likes me to talk about it because no one believes it anyway".

Tesla reached an all-time high on Dec 26, but even then each share was worth just US$430.94.

ARK Invest has seven ETFs. Its flagship fund, the Nikko AM Ark Disruptive Innovation Fund, is focused on large-scale technological innovation stocks in public markets that are centred on genome sequencing, robotics, AI, energy storage and blockchain technology.

Asked if these stocks are too "ahead of their time" to invest in, Ms Wood says no. "We have to believe that in the next five years, these companies will hit an exponential growth path, and so it's not like we are picking a technology like many people in the dot-com bubble did in the late '90s," she says, describing the mistake many investors made speculating on Internet-based companies, only to find themselves burnt when the bubble burst.

"The costs were still too high... Back then in the tech and telecom bubble, we had investors chasing dreams."

She adds that the way to tell dreams from reality, or to discern if a technology is close enough to maturity, is by looking at the cost of production of a new technology. According to Wright's Law, a relative of Moore's law, technological progress increases with experience, and so each percentage increase in cumulative production should result in a fixed percentage improvement in production efficiency.

Take genetic mapping for example. "Today, the cost has been falling 40 per cent per year and is now below US$1,000 while it takes less than a day's worth of computing power to execute. In five years' time, it would cost US$100 and take less than an hour's worth of computing power, so we believe that within the next five years, your geneticist - and you will have one - will ask you to get your genome sequenced every two to three years to see what in your genome has mutated."

This is because mutations are the earliest manifestations of disease, and so would allow for early detection of cancer for example, she says.

The US$2 billion fund, established in the October of 2014, hit its five-year mark this year, and surpassed its target of a 15 per cent compound annual rate of return over five years. As at end-October 2019, the fund was up 18.75 per cent, versus the MSCI World Index and S&P 500 Index which were up 7.81 per cent and 11.01 per cent respectively over this period.

Ms Wood says that the firm typically doesn't use benchmarks, but "only for perspective, to see how the broad market is doing".

She expects institutional participation to increase going forward, up from the current 10 per cent, now that the fund has built up a track record and delivered on its target.

She adds that investment research in technologies of the future requires analysts to abandon tried-and-tested financial models and start on on a blank sheet. For instance, they may need to see Tesla not as an auto company, but a combination of robotics, AI and energy storage. They also have to switch from a value-oriented mindset to a growth-oriented one.

"We believe that passive investing is investing in the past, and indices are where they are because of what has happened historically. That isn't interesting to me.

"What's interesting to me is figuring out how a technological innovation is going to change the way the world works. I really believe we are allocating capital to its highest investment use, and we are doing that in the public market where there is a void in terms of research and portfolio management. This is as opposed to the private markets which are hugely overvalued when it comes to innovation, as institutions are always vying for pre-IPO deals."

Pointing out that major sectors which make up the biggest positions on indices are currently under assault, from banks to energy, retail, media, infrastructure and auto, Ms Wood believes that the fund's strategy is an excellent hedge against the value traps that are populating broad-based benchmarks.

"We also think that it's going to be a significant source of capital appreciation if we are right about the exponential growth curves," she adds. "Over a five-year period, we are confident of outperforming the broad-based benchmarks and outpace them significantly for two reasons - firstly, because the value traps are going to weigh down the indices, and secondly, because the exponential growth is going to lift up our portfolios."

  • Nikko AM Ark Disruptive Innovation Fund is distributed by Nikko Asset Management in the Asia-Pacific region.

Finding the silver lining in the Silver Economy

AXA WF Framlington Longevity Economy

A LONGEVITY fund is not all about investing in "old people stuff", as Dani Saurymper, lead portfolio manager of the AXA WF Framlington Longevity Economy fund will tell you.

"It shouldn't mean we only look at products for the aged, but we are looking at and caring about the whole of life, not just the end of one's life. Because how we live our lives today matters. A healthier lifestyle will translate into how we fare in old age," he says.

The US$135 million fund launched in August 2018 invests in four main longevity-related themes: wellness, silver spending, senior care and treatment. The idea is that people live to riper ages these days and the majority of children born in rich countries can expect to live to more than 100.

"What we have seen in the scientific arena is that essentially every 10 years, we add 2 to 2.5 years to the human lifespan," Mr Saurymper says. This will require significant lifestyle changes. For instance, people would need more money for retirement.

Healthcare demand for chronic diseases will spike. So under the theme of wellness and prevention, the fund would also invest in companies involved in fitness, health and nutrition, vaccination, diagnostics, preventive screenings, disease monitoring and education.

It would also invest in consumer sectors that the elderly tend to splurge in. Euromonitor estimates that the over-60 consumer market is worth US$15 trillion. Nowadays, seniors are spending a lot more money not just on healthcare, housing and transport, but also in personal care products, travel, leisure, entertainment, even beauty (think Botox and dermal fillers).

The fund seeks out industries which have a much higher proportion of revenue contribution from older consumers, such as cruises, online travel platforms, even pet care and online dating, as the elderly crave companionship especially after their partner dies.

There are also companies related to wealth and asset management, retirement and legacy planning, as well as cosmetic and even plastic surgery. "It encompasses a pretty broad range of investments," he says.

Hospital operators, nursing homes, insurers, staffing firms for healthcare specialists, investment trusts focused on building assets to meet the bed shortage for the aged, and funeral services would fall under the senior care pillar.

As for the education pillar, it would include online education portals for physicians and healthcare professionals, as well as institutes that help middle-aged workers reskill to change industry or cope with technological changes.

Mr Saurymper says the fund typically invests with a four- to five-year time horizon. Asked whether its performance has met its original target to grow at least 10 per cent per annum, he says that it is too early to tell, given that it has only been a year since inception.


Still room to grow for sustainability and impact funds

Janus Henderson's Horizon Global Sustainable Equity Fund

THE first time Janus Henderson Investors' portfolio team launched its sustainability strategy in the United Kingdom in 1991, sustainability wasn't even a buzzword yet.

Twenty-eight years on, if you ask Hamish Chamberlayne, head of sustainable responsible and impact investing at Janus Henderson, if the sustainability investing space is already saturated, he would tell you straight: "We are not saturated, that's for sure."

This is despite the many new fund launches over the last three to four years, as asset managers attempt to cater to client demand by implementing sustainability considerations into their investment strategies.

For him, as long as the United Nations' sustainable development goals are not yet achieved, there is still room for more funds to join the bandwagon.

Janus Henderson's Horizon Global Sustainable Equity Fund, which is the version of the fund available to retail investors in Singapore, had US$244 million in assets as of June 30, 2019, while the overall strategy has US$1.34 billion in assets under management as at end-November 2019.

The fund holds between 50 and 70 stocks focused on investing in goods and services beneficial to the development of a sustainable economy. The manager applies a fundamental research process, including engaging with companies, to screen for and monitor the stocks.

The fund focuses on the four mega trends of population growth, ageing population, resource constraints and climate change. It has a large overweight to information technology stocks, while consumer staples, healthcare and energy make up its main underweight positions relative to the MSCI World index.

Mr Chamberlayne points out that at times, it might seem confounding why a certain company might be in its portfolio - for example, a lifestyle company such as Adidas. This has been one of the fund's outperformers this year. The stock is up more than 50 per cent in stock price year to date and in fact hit a one-year high of US$327 on Dec 20, 2019.

He says that not only are Adidas's goods aligned with encouraging active lifestyles, the company also has a strong sustainability focus. For instance, it is partnering environmental organisation Parley to convert plastic collected from the ocean into fibres that can be made into clothing and shoes. It is also researching a fully recyclable shoe, which dovetails with the idea of a circular economy - a "massive" investment theme that the fund believes will grow in scale over the next decade.

As of end-September 2019, the UK OEIC version of the fund returned 10.5 per cent net of fees, versus 8.4 per cent by the MSCI World Index. The version of the fund sold in Singapore only launched in May this year and so does not have a long performance history.