The best ways to invest in the big themes changing the way we live and work
Thursday 09 Jan 2020 Author: Yoosof Farah

In the early 1980s, American telecoms giant AT&T asked consultant McKinsey to predict how many people around the world would be using mobile phones by the turn of the millennium.

Noting the problems with devices at the time – too heavy, batteries that kept running out, patchy coverage and exorbitant costs per minute – McKinsey confidently concluded by the year 2000 there would be approximately 900,000 mobile phone users worldwide.

The consultant persuaded AT&T to roll back its investment in mobile phone towers and pull out of the market, arguing demand would be too small. By the time 2000 rolled around, there were actually 109m mobile phone users globally.

The decision cost AT&T massively. A decade after pulling out of mobiles, having lost billions in potential revenue, it had to spend $12.6bn acquiring mobile phone upstart McCaw Cellular to get back into what was becoming a lucrative and rapidly expanding market.

WHY IS THIS RELEVANT NOW?

While many people knew portable, handheld phones were inevitably going to thrive in the future, nobody quite predicted just how rapidly
and expansively the mobile industry would take off.

Some argue it is the same with megatrends, i.e. big trends which, like mobile phones back in the day, are changing the world.

In the next decade and beyond, most people (though perhaps not some politicians) agree climate change, for example, could fundamentally alter the way we live.

All the while technology is advancing quicker than ever, our population is rapidly growing and as they develop, previously poor countries are getting richer and having a bigger voice on the global stage.

For savvy investors, having exposure in their portfolio to such major events means there’s the potential for money to be made.

Under the banner of thematic investing, various investment funds and exchange-traded funds (ETFs) offer access to themes or trends that are happening now and are likely to shape the future, with the biggest of these themes or trends called megatrends. Read on to discover our favourite ways to get exposure.

WHAT ARE THE MEGATRENDS?

According to fund firm Pictet, which specialises in thematic investing, a megatrend can be described as a ‘force of change that has gathered its own self-sustaining momentum’.

There are four main megatrends experts seem to agree on – rapid urbanisation, climate change and resource scarcity, a shift in global economic power, and demographic and social change.

And they are all are underpinned by the driving force which has really defined the last three decades – technological breakthrough.

‘These themes have always been happening,’ says Rob Powell, product strategist at BlackRock’s ETF arm iShares. ‘But now we’re seeing the disruption happening far faster than in the past.’

Powell cites the shift away from fossil fuels and the emergence of wealth in China and India as examples, as well as rapid urbanisation in the former location.

There are now more than 100 cities in China with populations above 1m, and Powell says there are some estimates this could double in the next decade.

Investing in megatrends is not always a smooth ride

Two of the most popular thematic ETFs, both of which hold companies set firmly to benefit from various megatrends, are L&G ROBO Global Robotics and Automation (ROBG) and iShares Automation & Robotics (RBOD).

Last year the L&G ETF returned 25.3% while the iShares ETF returned 35.7%.

Robotics as a theme has gained traction for a number of years, but it’s worth noting that while performance of many robotics funds was strong in 2019 the previous year was the opposite, a reminder that megatrends can still come with considerable volatility on the stock market.

Following strong gains in 2016 and 2017 as investors took more interest in robotics and artificial intelligence firms, 2018 saw a significant sell-off as the economic environment led some investors to shy away from backing capital-intensive companies as well as become nervous about highly-rated stocks.

Performance has bounced back as the market sees the potential of these firms in a changing world.

WHY IT PAYS TO HAVE A LONG-TERM FOCUS

While the share prices of companies set to benefit from such trends will still be affected in the short-term by market noise and macroeconomic factors, the long-term expectation among investors is that these share prices will increase markedly over time irrespective of where we are in the economic cycle.

Certainly investment performance in 2019 has strengthened that view over some of these megatrends.

Past performance is no guarantee of future returns, as any investment literature will always tell you, but the performance of several thematic funds and ETFs over the past year has been stellar.

In water for example, an increasingly popular theme, Lyxor World Water (WATL) returned 29.8% last year.

While with shifting global spending power, EMQQ Emerging Market Internet & Ecommerce (EMQQ) returned 30.2% over the same period.

WHEN TO GET INVOLVED

Allianz Global Investors’ head of thematic investing Andreas Fruschki says the two best entry points for investors to get involved are at the very beginning and also following a sell-off.

He explains: ‘Stocks typically rally in these early years on the back of high expectations, which are then often followed by a sobering sell-off when things turn out to move much more slowly than originally thought.

‘This then creates the second entry opportunity into the theme after the initial hype has passed, as the underlying trends which fuelled the theme will remain intact.’

We believe all the five megatrends featured in this article have gone beyond their initial hype stage and that now is a good time to buy.

KNOW WHAT’S UNDER THE BONNET

For some of these themes, it is important when doing research to fully consider what it is you’re looking for.

When seeking to gain exposure to climate change and resource scarcity as a trend, for example, some of the options can be very
wide-ranging.

Investing in a general sustainability fund casts a wide net and while some of the companies in the portfolio may have strong ESG criteria, they might not be the type of firms that immediately come to mind when tackling climate change. For example, two of the top five holdings in Rathbone Global Sustainability Fund (BDZVKD1) are Visa and Microsoft.

Given how climate change combined with a rising global population has the potential to cause acute water shortages, investing in a water fund could be a more targeted way to approach the broader theme.

Such popularity for these themes is illustrated by Fidelity recently deciding to launch a UK version of its Sustainable Water and Waste fund. Water may not come across as the raciest investment idea, but the fund’s Luxembourg-domiciled equivalent has taken in a whopping $1bn of investors’ money in little over a year since it launched.

‘The story of water and waste is as old as the story of civilisation,’ says the fund’s manager Bertrand Lecourt.

‘Just as there can be no economy without water, a sustainable economy relies on its approach to waste management. Yet despite this, companies in the sector remain relatively unexplored by investors and there are very few funds dedicated to this unique theme.’

WATER: A LOWER-RISK THEME?

According to Powell at iShares, water could appeal to investors with a lower-risk appetite who want to get on board with megatrends.

Instead of investing in high growth and capital intensive start-ups with dazzlingly innovative technology, money is instead invested into
shares of water and sewage firms.

Holdings in exchange-traded fund iShares Global Water (IH2O) include large cap water and waste companies Pennon (PNN) and United Utilities (UU.), and though they may sound boring their share prices have risen around 50% and 30% respectively in the past year.

Powell explains: ‘Water is potentially a lower risk theme as a lot of these funds invest in utilities, which are seen as a more bond-like equity, and can potentially protect on the downside.

‘The rationale behind water as a trend is that climate change is putting challenges on the global water supply, while you also have a rapidly rising global population.

‘There’s increasing demand while supply is being challenged, and utilities can be a key part of solving the problem.’

HEALTHCARE ATTRACTIONS

Powell also highlights healthcare as a long-term trend with tangible need for investment.

Between 10% and 11% of global GDP is spent on healthcare, a figure which is estimated to double in the next 10 years as rapid urbanisation and a growing and ageing global population place a greater strain on health infrastructure.

It’s important not to get carried away with investment stories, but certainly forecasts for various healthcare markets back up the
sector’s promise.

According to a white paper by ETF provider HANetf, the market for healthcare apps is expected to grow 29.3% a year to reach $102.35bn by 2023.

Precision healthcare, i.e. customised practices and products tailored to the individual patient, is forecast to grow 11.2% a year out to 2026, while the market for medical robotics is set to grow 20.8% a year to reach $24.6bn by 2025.

Healthcare trackers, biological engineering and bioinformatics (extracting knowledge from biological data) are also expected to grow by double-digits annually for the next three to five years.

Like a lot of investment themes, most of this growth is likely to come from emerging markets.

Health spending per capita from OECD nations (which excludes countries with rapid growth like China, India, Indonesia and Nigeria) will hit 10.2% of GDP by 2030, up from 8.8% in 2018.

WHICH INVESTMENT ROUTE SHOULD I TAKE?

There are plenty of options for investors to play the megatrends discussed in this article. Going for individual stocks can be an option, particularly if picking lower risk companies like utilities. But most of the opportunities come from sectors where specialist knowledge is needed to pick the winners, like healthcare innovation and robotics and automation.

As such, choosing a fund from an investment company that specialises in thematic investing or tracks a specific thematic index might be a better way to get exposure, as some firms set to benefit most from megatrends can be difficult for retail investors to access directly.

There are a number of broader funds and investment trusts for investors to choose from, but a lot of the thematic selection comes from ETFs.

According to Hector McNeil, co-CEO of HANetf, a key reason behind the wide range of thematic ETFs is index development, which has become ‘significantly more creative and scalable’.

And like the ETFs which follow them, some of these indices have had a stellar run over the past year. For example, the MSCI World Information Technology index – followed by several technology and robotics ETFs – returned 41% in the past year.


OUR TOP PICKS FOR PLAYING THE FIVE MEGATRENDS

Megatrend #1: RAPID URBANISATION

BUY Pictet Digital (B50P236) at £346.34

Our future is set to be urban. More than half the population live in urban areas and 1.5m people around the world move to cities every week. This will be driven by three countries in particular – China, India and Nigeria.

Big growth in people moving to cities poses big challenges, with innovation in digital technology often labelled as a way to solve problems that come with urbanisation.

One of the funds that best capture this trend is Pictet Digital (B50P236), which invests in companies like Chinese internet giants Baidu and Alibaba. It’s not cheap with an ongoing cost of 1.2% a year, but has a consistently strong track record and has a five year annualised return of 17.6%.

Examples of other investment products relevant to this megatrend

BlackRock Future of Transport

iShares Digital Security ETF

Axa Framlington Robotech


Megatrend #2: CLIMATE CHANGE AND RESOURCE SCARCITY

BUY WHEB Sustainability (B8HPRW4) at 233.34p

BUY Lyxor World Water (WATL) at £36.87

Average temperatures could rise by over two degrees Celsius, a threshold for potentially irreversible environmental change. While globally, by 2030 a growing population will demand 35% more food, 40% more water and 50% more energy, according to PwC.

Investors should look to back companies which can provide solutions to these challenges. That’s where WHEB Sustainability Fund comes in. The well-regarded multi-themed fund has a strong track
record and delivered a 21% return in 2019 according to Morningstar data.

It invests mainly in mid-cap companies in sectors such as resource efficiency, sustainable transport and water management. The fund has delivered an annualised return of 11% over the past five years.

An alternative investment idea for this megatrend is Lyxor World Water (WATL). Tracking a benchmark which follows the 30 largest water companies in the world, the exchange-traded fund returned 32% in 2019 and has a five-year annualised return of 13.4%.

At a total cost of 0.6% a year, it is considerably cheaper than many other water funds.

Examples of other investment products relevant to this megatrend

RobecoSAM Sustainable Water

Pictet Clean Energy

iShares Global Timber & Forestry ETF

iShares Agribusiness ETF

Sarasin Food & Agriculture Opportunities


Megatrend #3: SHIFT IN GLOBAL ECONOMIC POWER

BUY Robeco Global Consumer Trends (B1HNV38) at €260.14

Developing economies have been lifted by globalisation and manufacturing shifting to Asia.

Emerging markets (EM) will continue to offer growth; to the extent that India could replace the US as the world’s second largest economy by 2050.

EM economies today are predicted to represent six out of the seven largest economies by 2050.

Looking at structural growth trends in consumer spending across the world, both in developed and emerging markets, investment fund Robeco Global Consumer Trends (B1HNV38) has been a consistently strong performer.

The fund is focused on three areas: the digital consumer, growing consumer spending in emerging markets, and the appeal of strong brands.

It has a five-year annualised return of 13.9%, while in 2019 it delivered a total return of 36.8%.

Examples of other investment products relevant to this megatrend

iShares EM Consumer Growth ETF

WisdomTree EM Consumer Growth Fund

EMQQ Emerging Markets Internet & Ecommerce ETF

Fidelity China Consumer

iShares EM Infrastructure ETF


Megatrend #4: DEMOGRAPHIC AND SOCIAL CHANGE

BUY iShares Healthcare Innovation (HEAL) at $6.67

By 2030 the world’s population is projected to rise by over 1bn. People are also living longer and having fewer children.

iShares Healthcare Innovation (HEAL) invests in an index of developed and emerging market companies ‘pushing the boundaries’ in medical treatment and technology.

The ETF has a decent track record with a three year annualised return of 13.8%, and a significantly lower cost than some other relevant funds with a total expense ratio of 0.4% a year.


Examples of other investment products relevant to this megatrend

iShares Ageing Population ETF

L&G Healthcare Breakthrough ETF

BB Healthcare Trust

HANS-GINS Indxx Healthcare Innovation ETF

Assura


Megatrend #5: TECHNOLOGICAL BREAKTHROUGH

BUY L&G ROBO Global Robotics & Automation ETF (ROBG) at £12.72

Breakthrough innovation is necessary to address large-scale challenges (such as ageing economies and climate change), while new solutions are also targeting other challenges such as payments.

As part of this megatrend, robotics and automation are crucial to improving corporate productivity. They can often perform many tasks more efficiently and to a higher and more consistent level of quality than humans.

A good way to play this theme is via L&G ROBO Global Robotics & Automation ETF (ROBG).

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