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'Spot the theme, not the sector' when investing
ONE of the most common mistakes investors tend to make is relying on talking heads and not looking at the data for themselves.
And even those who do, tend to focus too narrowly on sector-specific indices and avoid wider thematic investment opportunities, said Christopher Versace, chief investment officer of Tematica Research.
Mr Versace, who will be speaking on August 5 at this year's Invest Fair organised by Share Investor and The Business Times, advocates thematic investing rather than sector investing to effectively maximise investment returns.
"We see sector investing as dead," he said. "When we look at the vast majority of institutional investors who follow a sector-based strategy, they tend to underperform their benchmark, like the S&P 500."
According to him, 99 per cent of actively managed US equity funds sold in Europe have failed to beat the S&P 500 over the past 10 years, while only two in every 100 global equity funds have outperformed the S&P Global 1200 since 2006.
"Investors need to think differently from the herd if they want to outperform. We prefer a thematic approach that looks at the shifting landscapes of economics, demographics, psychographics, technology, and a few other factors to identify pronounced tailwinds as well as headwinds."
He said the key to investing is in finding the companies that are benefitting from these thematic tailwinds.
He favours this approach as it uses data points found in all aspects of our everyday lives.
An investment theme is not the same thing as a trend. An investment theme is a sustainable market shift that is permanent rather than temporary.
It is "a change that shapes and impacts consumer behaviour and, in turn, forces companies to make fundamental changes to their businesses in order to succeed", said Tematica Research.
Some examples of investment themes that it has identified include investments in areas corresponding to demographic and sociological trends like "Ageing of the Population", "Foods with Integrity" and even the whimsically named "Fattening of the Population".
Tematica Research said the investments in a theme would seek to capitalise on companies which were well-positioned to address the given theme across different sectors.
Other themes focus on different areas, for example, business models on "Disruptive Technologies", "Asset-lite Business Models", as well as "Connected Society".
Another fundamental aspect of thematic investment is in paying attention to current geopolitical events.
Two such events include the US Federal Reserve's unwinding of its balance sheet in September, and the potential for the European Central Bank to adopt a tighter monetary policy, said Mr Versace.
"With the dollar weakening as the US economy slows, as well as political concerns and the increasingly likely pushout in the next Fed rate hike, we'll be watching to see what it means for US export orders and if that leads to a shift away from Europe and Asian economies."
For more information on this year's Invest Fair, head to http://sg2017.invest-fair.com/