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The search for funds that invest in specific themes
We’re amazed by how few funds and investment trusts provide clear information on their portfolio’s underlying themes. Many people choose funds and investment trusts in order to play specific themes, yet most thematic products only market themselves based on geographic or single sector coverage.
Property funds are arguably the only area where it is easy to find different ways into the sector such as medical centres, student accommodation or large warehouses.
But what if you want to play themes like e-commerce, the rise of the electric vehicle industry or cyber security? These are all large industries with considerable growth prospects so it makes perfect sense to have some allocation to them in a diversified portfolio. So how do you find the right product?
WHAT IS THEMATIC INVESTING?
Consultant McKinsey says thematic investing requires a fundamental understanding of the impact of long-term economic, political and social trends on regions and sectors, which reveals investable opportunities.
ETF provider Global X Funds says many investors already apply principles of thematic investing, such as identifying investments that could benefit in a rising interest rate regime, in their portfolios.
‘But thematic investing extends far beyond economic policies, and can potentially be most effective when used to identify opportunities in areas such as changing demographics, evolving consumer behaviours, innovative technologies, and the availability of natural resources,’ it adds.
‘Successfully implementing a thematic investment strategy requires correctly identifying structural shifts, finding companies with high exposure to those shifts, and timing the theme so as to enter early enough that earnings and forecasts have not fully priced in the theme’s potential.’
BROAD INVESTMENT THEMES
Most actively-managed funds and investment trusts fall under the broad universe of: value, growth, income, multi-asset, opportunities, or concentrated on a specific sector like technology or geography such as North America. These aren’t always the easiest starting points for an investor who wants to play a specific theme.
Some funds and investment trusts argue they don’t restrict themselves to following a certain industry or theme. That’s fine; but what about the ones who do follow more focused paths?
The exchange traded funds (ETF) industry is arguably better at marketing itself as a source of more niche thematic investments.
There has been a proliferation of ETF launches over the past few years including one exposed to companies battling obesity; another tracking the drone industry; and one tracking a gender diversity index which focuses on large US companies with the most women on their boards or in senior roles, compared with peers. There are many others.
The aforementioned examples are all overseas-listed ETFs. On the UK market you’ll find a smaller pool of niche thematic passive products. For example, ETF Securities last month launched three products playing the themes of energy storage solutions, drugs trying to combat rare diseases and e-commerce logistics.
SEARCHING FOR THEMES AMONG ACTIVELY-MANAGED FUNDS
Thematic ETFs are fairly easy to find if you know which theme you want to play, as the theme tends to be in the product title. It’s a lot harder to find thematic actively-managed funds and investment trusts.
Apart from the aforementioned property ones, you tend to only discover which specific themes are central to a fund or investment trust’s strategy by reading annual reports or watching fund manager videos, beyond the broad descriptions discussed earlier in this article.
For example, T Bailey Dynamic Fund (GB00B1LB2Z79) is big on thematic investing, although that’s not clear from its website or factsheet.
The only hint that it likes themes is the fact its top 10 holdings include a robotics ETF and a fund that invests in businesses helping to safeguard the integrity, health and freedom of individuals, companies and governments.
T BAILEY DYNAMIC KEY INVESTMENT THEMES
CHANGE IN INTEREST RATES
EXPOSURE TO GROWING MIDDLE INCOME GROUPS
We only discovered it followed a series of key investment themes after interviewing Peter Askew, chief executive of T Bailey Asset Management.
Askew says he and his team have been looking at ways to include the fund’s preferred themes on the factsheet but so far haven’t found a solution.
‘We’re up against space limitations and there are certain things we have to include on the factsheet for regulatory purposes,’ he explains.
It’s not impossible to publish the list of themes, as Artemis-run Mid Wynd International Investment Trust (MWY) has shown. Fund manager Simon Edelsten believes the investment trust is the only one in the industry to prominently display the theme split on the factsheet.
Mid Wynd prides itself as wanting to profit from long-term trends and publishes a table that breaks down the weighting of each theme in its portfolio. At the moment, automation, emerging market consumer, online services and tourism are the largest themes.
‘We want to offer transparency. The more we can help people to stay confident in how money is invested, the better,’ says Edelsten.
‘We identify a driver that could last three, five, 10 or even 20 years, driving up the cash flow of a company faster than economic growth would do.’
THE DOWNSIDE OF “HOT” THEMES
One of the disadvantages of using thematic ETFs is that they are likely to have been constructed as a result of demand for ‘hot’ themes. As such, there is a chance that valuations for the underlying holdings may have already been pushed up due to strong demand for the stocks.
Edelsten says he tries to identify themes and good value stocks before they are picked up by the wider investment market.
He pays close attention to valuation and won’t pay any price simply to get exposure to a certain theme. He will start to sell holdings when they become highly valued, even though they may be components of his preferred investment theme.
‘We also use themes as a risk management tool,’ explains the fund manager. ‘For example, we’ve recently added to American railroad. Freight rates are regulated; when inflation happens they can put prices up. The industry should do better if the market is worried about inflation.’