Why should investors consider allocating to themes, especially in the current environment?
It can be easy to get lost in the daily noise of the market. Thematic investing is a powerful tool to decouple from this – to take a step back and focus on what is important in the long run. What we’re trying to capture with thematic investing is long-term structural change. The starting point for us is what we call megatrends – things like demographic change, resource scarcity, technological innovation and urbanisation. Even if we think the economy will go into recession, such structural change will still happen. Any company on the stock market can be linked to demographic change in one way or another. This is where themes come in because themes effectively give a more precise definition and clear guidance on what to look for and how to invest.
Why should investors choose an active approach when it comes to thematic investing?
Themes move in cycles. With a new theme there is often the ‘hype phase’. It’s new, it’s fresh, everybody likes it, everybody wants to get onboard. It’s a good period to invest because the returns can be quite large, but it’s also very risky because expectations can get carried away and detached from fundamental development.
This leads to the second phase where you have disappointment. That is obviously when you don’t want to be invested. Once expectations have been reduced to realistic levels there’s a third phase where the fundamental development of the theme plays the most important role, which is again a good phase to be invested in.
Looking at these cycles, there are plenty of examples out there. Think of hydrogen, which was hyped at a certain stage. There is some fundamental development, but it’s probably not as quick as was initially expected by many participants. It’s still developing. You want to have exposure at some stage and this is what we want to capture with active investment – using our skills and experience to take advantage of the return opportunities while also mitigating the risks.
How often do you change themes in the portfolio?
The Allianz Thematica strategy was launched in 2016. There’s a Luxembourg fund that is quite sizeable now and we launched an OEIC for UK investors in April this year. Since inception, we have owned 14 different themes, 11 of which have outperformed global equity markets as measured by the MSCI All Country World index, so we’ve done well in picking and timing our investment in themes.
There are seven themes in the current portfolio. That is a typical pattern – we own five to seven themes but they change because it is an actively managed multi-thematic fund. The most recent change to the makeup of the themes came in December 2021 when we added a theme we’ve called ‘intelligent machines’. It is about investing in the hardware and software powering warehouse and factory automation. All companies are feeling the pinch of inflation – wage inflation, supple chain pressures – and the way to overcome this is automation. It was an opportune time to invest in our opinion.
“Next generation energy, in my opinion, might even be the instrument of choice to get the economy out of recession”
Would you say automation is the most promising theme right now?
I’m not sure. You love all your kids, so it’s always difficult to make a choice between them. The work we do in evaluating themes is always ongoing. Are the drivers still intact? Are our expectations valid?
It’s something we do daily. All the themes in the portfolio currently have our support, so it’s difficult to make a choice. If I had to choose though, I would probably pick another theme – energy transition. Call it what you will – clean energy or smart energy. We’ve called it ‘next generation energy’ – but it enjoys widespread government, regulatory and societal support. That’s a very comfortable situation for us as investors.
We are investing in the enablers – the technology service companies that will make the transition possible. We believe what makes the theme so interesting just now is that with countries striving towards energy independence the investment in clean energy needs to happen faster and it’s unlikely to be affected by the recession. Next-generation energy might even be the instrument of choice to get the economy out of recession.
What does 'long term' mean in thematic investing? How many years are we talking about?
It can be many years. There are two themes in the portfolio that have been there since the start; others have had a shorter lifespan. Ideally, you should have a very long-term view, but it’s important to be mindful of the potential mismatch between the very long-term structural outlook and what happens in the market.
A good example is the theme of education. In emerging markets it’s the way out of poverty. In developed markets, it’s lifelong learning. But on a short- to medium-term view, the theme has been broken. China boasts the biggest market for private education services but since the Chinese regulator stepped in and killed it off, we have concluded that you can’t make any money out of this theme at this point in time.
What would you say to people who think thematic investing is volatile and risky and don't want to get into that space?
It’s something we hear quite often. That might be true for single theme funds but we are mixing themes to tap into different drivers. Our multi-thematic portfolio has the same volatility as the MSCI All Country World index, so it has the same risk profile as global equity markets. When you consider that since inception our Thematica strategy has outperformed the index by 3.81% p.a.1, we have achieved our long-term capital growth objective.
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