Savvy investors have always looked at broad social and environmental trends – a graying population, resource shortages, emerging technologies – to inform their investment perspective. Today, however, some financial powerhouses are now creating funds built around foretelling the future, and separating the winners from the losers based on these predictions. At the moment, thematic investing still appears avant-garde, but investors of this stripe have launched dedicated funds at big-name institutions – Bank of America Merrill Lynch and AllianceBernstein, among them.
And in fact, the CPP Investment Board, which has $238.8 billion in assets under management, has a coordinated fund devoted to thematic investing. According to Poul Winslow, Managing Director and Head of Thematic Investment: “Thematic investing is a natural fit for a pension fund like CPPIB that focus[es] on the long term. The themes we focus on have long horizons, which match our investment focus.”
For many IROs, thematic investors look like a dream audience. Sarbjit Nahal, Head of Thematic Research at BofA Merrill Lynch Global Research in London, points out that the rise of thematic investing corresponds with a desire on the part of many investors to move away from a preoccupation with quarterly results. “We’re seeing a longer-term mindset,” he says.
“If you’re getting a thematic investor, you’re getting a long-term investor,” agrees Marie-Josée Privyk, Director of Investor Relations and Sustainable Development at Innergex Renewable Energy, Inc., in Longueuil, Quebec.
What Thematic Investors Do
“Thematic investing helps you look broadly at different industries and how those industries will be affected by a particular theme,” says Privyk.
For Privyk, thematic investment and risk management are closely aligned: “Thematic investing is looking to the future and trying to see how things are going to evolve and for which companies an event will present opportunities and for which companies it will present risks.”
Often, the trend in question is less important than how a given management team chooses to respond, she says. “How are companies addressing those opportunities and risks? This requires very long-term, high-level thinking.”
Nahal notes that definitions of thematic investing vary, but at BofA Merrill Lynch the emphasis is on a transforming world as embodied in five big-picture themes: earth, government, innovation, markets, and people.
To illustrate how megatrends are shaking up the corporate landscape, he points out that the growing obesity epidemic has implications for many businesses. Worldwide, 671 million people are considered obese. In the U.S. alone, 21 percent of medical spending has been tied to obesity and the global costs are thought to exceed $2 trillion.
Nahal underscores that the global obesity crisis is creating opportunities for healthcare and pharmaceutical companies that offer treatments for the overweight. The implications for food companies are equally profound. “Mainstream consumers are increasingly looking to eat healthier foods and beverages,” he says, noting that the healthy food and beverage industry is worth an estimated $932 billion a year. What’s more, he says, these companies are in a high-growth, high-margin sector.
Another megatrend is increased longevity and an expanding senior population. Nahal points out that people over the age of 60 accounted for a mere 8% of the global population in 1950, while today 13% of people have passed their sixtieth birthdays. Given medical advances, people will almost certainly continue to live longer. He points out that children born in developed countries today are expected to live to 95 or 100.
While this longevity boom is putting retirement systems at risk, it’s also creating multiple opportunities in healthcare, pharmaceuticals, and even in asset management. Nahal points out that in the U.S., $30 trillion in assets will shift from the Baby Boomers to the Millennials over the next 30 years. In addition, he says, “Insurers and asset managers are looking to emerging markets, particularly in Asia, because they’re in an accumulation phase in terms of savings instead of the decumulation phase.”
Finally, disruptive technologies are creating new groups of corporate winners and losers. There are approximately 171,000 cyber-attacks each day, and the average cost of remediating a cyber breach at an American company is about $12.7 million. “The attacks are more sophisticated with attackers lurking inside the system for an average of 205 days,” says Nahal. He points out that as companies hike cyber security spending, many technology companies are finding themselves in increasingly attractive competitive positions.
Seth Levine, Co-Founder and Partner at Foundry Group, a technology investment group based in Boulder, Colorado, confines itself to software, Internet, and IT investing and uses “a thematic lens to evaluate the companies and technologies we encounter.” He continues: “Our themes… are often based on an underlying protocol, standard, or market trend that we believe is on the cusp of widespread adoption and that has the potential to drive a cycle of innovation and company creation for at least a 10-year period.”
Levine clarifies that the technologies Foundry invests in are not pie in the sky. “We try,” he says, “to focus on themes and their underlying technologies that are ready to be rolled out to consumers or the enterprise and are well beyond the science experiment phase.” Foundry’s current themes include SMTP, RSS, and XML, or underlying technologies that power Web services, and distribution, which Levine describes as “leveraging the power of other networks – including the Web itself – to scale a product.”
Better Storytelling
Daniel Kenigsberg, Assistant Vice President, Investor Relations, at Manulife Financial, doesn’t have thematic investors beating down his door, and yet he points out that investors do occasionally inquire about trends in longevity. “In our annual report, we talk about longevity risk and how we manage it and how we’re exposed to it,” he says.
More central to Manulife’s IR story are wealth management and Asia, two areas of focus that pivot on demographic themes and are proving critical because roughly one-third of the company’s core earnings come from Asia. In Asia, Kenigsberg points out, the growing middle class and increased urbanization is a boon for Manulife’s business: “As people get wealthier, they start thinking more about insurance and having money to save and invest.” He continues: “Those themes certainly come out in how we position our growth story.”
Understanding prevailing themes is central to telling a company’s story effectively. For Kenigsberg, it’s important to understand that Asian countries are only just now developing the equivalents of Canada’s Registered Retirement Savings Plans (RSSPs). “People call up Japan when they talk about aging populations,” he explains. “When we go around and talk about Manulife and present Manulife at various investor functions, we’ll bring in some of the changes in Asia.”
For an IRO, using demographics as part of an overarching narrative is key. “People have always been looking for the story behind the company,” says Kenigsberg. “These demographic trends have always been a fairly big piece of a company’s story and why investors buy the stock.”
When asked what types of information thematic investors want most from IROs, CPPIB’s Winslow says that he’s “interested in the long-term planning of a company – and more specifically, how they will secure exposure to structural growth drivers.”
Finally, even though thematic and other investors are demonstrating an appetite for strategic insights and information beyond the traditional financial metrics, there’s some evidence that public companies are not rising to the challenge. Kathrin Bohr, Senior Partner at Stakeholder Research Associates, says that when it comes to sustainability reporting – which is where many thematic investors find answers to their questions – “the numbers in Canada aren’t very encouraging.” She recently looked at TSX companies and found that only 43% of the top 100 are doing “any form of what we’d call CSR or sustainability reporting.”
Long-Term Forecast?
It’s hard to tell whether thematic investing will become a dominant way of looking at investing or whether it’s simply a passing fad.
For Innergex’s Privyk, thematic investing ties in well with sustainable development because both are assessing risks and opportunities over the long term.
She believes that Innergex, an independent power producer relying solely upon renewable energy resources, is well positioned because megatrends like global warming and climate change are forcing people to recognize that new forms of energy are sorely needed. Even so, Privyk emphasizes that her company doesn’t fixate on environmental or social trends. “Are we specifically analyzing megatrends or themes?” she asks. “Well, no. Are we thinking long term? Absolutely.”
For Privyk, a greater awareness of thematic investment would be desirable but she frankly does not believe it’s imminent. “Down the road, I think these subjects – megatrends and sustainable development – are going to be part of the normal conversation between investors and companies. I’m optimistic about that, but I think it will take a lot of time. It’s not part of the mainstream conversation yet.”