Today, the market provides a wealth of choice, from robotics and artificial intelligence (AI) all the way down to alternative energy and biotechnology. Should investors play these structural growth themes in a targeted way or would they be better leaving it to the experts?
A raft of new launches during the past few years designed to target specific structural growth themes has left investors with a dizzying array of options.
Smith & Williamson, for example, has an Artificial Intelligence Fund; CPR Asset Management distributes Global Disruptive Opportunities through Amundi; BNY Mellon Investment Management has launched the Mobility Innovation Fund; and Nikko Asset Management and US-based Ark Investment Management have launched the Nikko AM Ark Disruptive Innovation Fund.
Passive managers have also introduced a range of options, and Legal & General Investment Management’s (LGIM) Future World offering includes funds focused on climate change and gender equality.
"You have to see how technology is changing things... that might be shifting demographics or energy demand."
Identifying a long-term structural growth theme is clearly more of a challenge than simply targeting a ready-made sector or geographic region.
According to Howie Li, head of ETFs at LGIM, the group puts considerable research into identifying those themes likely to endure over the longer term, while also looking at whether they are investable.
Says Li: “You have to connect to the overall viewpoint and see how technology is changing things. That might be shifting demographics or the demand for energy.
“Some themes don’t make the cut. For example, cryptocurrencies remain undefined. Are they a commodity or a currency? Blockchain is interesting but the investment opportunities are all in the private space. As such, it’s difficult to get ‘pure’ exposure.”
Li gives the example of cyber security: as data is the new currency, its protection has become paramount. This creates a multiyear growth theme with durability.
LGIM then partners with experts to identify the companies at the forefront of an individual trend to build the investment universe.
This will usually include both the companies creating the technology and those who are its greatest beneficiaries.
Wesley Lebeau, senior portfolio manager within the thematic equity team at CPR, says: “If we can identify the right themes, it means there is growth. We are looking at innovation and where it’s coming from. The history of tech is that it was driven by the corporate side, and then by the consumer.
“The new cycle of big data and artificial intelligence is another shift. We are looking at how we can leverage that. Thematic funds take advantage of a structural shift and new demand; companies have stronger structural growth prospects.”
This is particularly important at a time when technology is eating everyone else’s lunch. William De Gale, manager of the Bluebox Global Technology Fund, points out that in the US there has been no overall growth in operating profits for companies outside the technology sector since 2012.
Investors not exposed to certain key trends risk missing out altogether.
Nevertheless, there are a number of criticisms of this thematic approach. The first is whether it is truly possible to have ‘pure’ exposure to a theme. De Gale says: “There aren’t many pure play companies for some of these themes.
“For example, you could buy Google as an AI play but what you really get is a search business with some artificial intelligence on the side. The AI is not critical for the business and doesn’t change the value. It is difficult to be first to these themes, and if you’re not first you won’t make money out of it.”
According to Li, LGIM is aware of the problem and has found ways to manage it in its funds. he says: “We look at where the company’s revenues come from and where its revenue is being deployed. Within that, we can understand how ‘pure’ their exposure to the theme is.
“We have bellwethers, where up to 100% of the revenues come from individual themes. Then there are the non-bellwethers: companies where we are anticipating their direction and incoming revenues from specific areas.”
Lebeau admits there can also be problems with valuation for these ‘hot’ themes. If investors start to run with a theme, it can lead to over-crowding and then asset bubbles, posing a risk to investor capital. He says: “The most di‑ cult part is assessing the right level of valuation. There can be execution risk because these are younger companies with different risk factors we have to assess.”
He believes it is important not to be complacent about valuations but says “disruption in energy efficiency”.
A different approach
At the same time, individual themes can be derailed by specific events. Robotics companies have struggled this year as a result of the global trade war hurting China’s manufacturing base. By their nature these themes may not be particularly diversified.
Amaya Assan, senior research manager at Square Mile, says: “These funds are likely to experience more volatility. Global technology funds will be invested in more established tech businesses and won’t only be chasing new areas, such as AI.
“It can also be difficult to find these new areas in the listed world and the funds may be very concentrated.”
This is not the only way to invest in technology. For example, the Bluebox approach is to look at the overall direction of technology and aim to invest accordingly, rather than picking out individual themes.
This approach is neither thematic nor generalist. Says Assan: “Over the past 10 years, the real theme has been computers connecting directly with the world, seeing and understanding it. We are taking ourselves out of the loop and, in doing so, removing a bottleneck. This direct connection brings considerable opportunities.”
Companies geared to structural trends may not necessarily create value for shareholders and certain ‘hot’ themes may become highly valued. However, the majority of these new funds are managed with an awareness of these problems. There are undoubtedly risks but these are important areas for the future.