For investors chasing “the next big thing,” there’s an oft-repeated warning: Predicting the future can lose you millions, even when you get it right.
For every iPad there’s a Newton. For every Facebook there’s a MySpace.
Yet as the decade begins, more cash than ever has flowed into thematic funds, which hunt for tomorrow’s winners based on today’s emerging trends. Assets under management doubled in three years to reach $175.2 billion at the end of December, according to data from Morningstar Inc.
Already in 2020 there are signs the growth will continue: Lazard Asset Management launched a new offering this month, the latest addition to an increasingly crowded field currently ruled by firms including Pictet Asset Management and Nikko Asset Management’s venture with ARK Invest.
Whether in electric vehicles, medical research or energy, riding macro waves of disruption is not for the faint of heart. Transformational trends don’t always look that way in the early days, while the pace of change can be punishing and unpredictable. An early Pictet bet on the first wave of clean energy was stymied by development costs. ARK Invest is currently raising eyebrows with its ultra-optimistic view of Tesla Inc.
Yet these days even traditional active managers are taking on more thematic exposure within their portfolios, according to Kenneth Lamont, senior research analyst at Morningstar in London.
“All of this bodes well for growth in the space in the coming decade,” he said.
Here’s a snapshot of some of the biggest funds in the thematic-investing world, plus the latest arrival:
Nikko AM ARK Disruptive Innovation Fund
Focus: DNA sequencing, energy storage, robotics, AI, blockchain technology
2019 Returns: 33%
Top Holdings: Tesla, Illumina, Invitae
The five trends targeted by this fund will converge to create a boom unseen since the second industrial revolution in the late 19th century, according to Renato Leggi, a portfolio manager at ARK Invest. He sees a parallel with history and simultaneous advances in electricity, the telephone and the internal combustion engine.
“Companies associated with these platforms should generate more than $50 trillion worth of business value and wealth creation over the next 10 to 15 years,” said Leggi. “If you look at the current value today, these companies are estimated at less than $6 trillion.”
One key criteria ARK looks for: The cost decline associated with the technologies should be at a tipping point -- making it affordable to the wider public.
CPR Asset Management Global Disruptive Opportunities Fund
Focus: Companies benefiting from disruptive business models
2019 Returns: 38.85%
Top Holdings: Teladoc Health, SolarEdge Technologies, Twilio
The mega trends that CPR focuses on include demographic and social changes, globalization, technological revolution and environmental challenges.
The firm estimates that by 2050, the world’s population will total 9.7 billion and the number of people aged 60 and older will more than double. This will foment a 50% rise in energy consumption by 2030. It also expects 50% of patients with chronic conditions to rely on virtual health assistants by 2022.
Thematic investing “offers higher and sustainable growth opportunities that we want to benefit from over the longer term,” said Estelle Menard, deputy head of global thematic equities at the firm. “It’s storytelling. Once people understand the themes, they are more likely to invest.”
CPR AM Silver Age Fund
Focus: Demographics, aging, health
2019 Returns: 24.4%
Top Holdings: Vivendi, L’Oreal, Roche Holding
CPR’s Silver Age Fund seeks to invest in sectors that benefit from the aging population. The components provide a glimpse at the diversity of thematic funds: Top holdings include digital and pay TV provider Vivendi, anti-aging cream manufacturer L’Oreal, and pharmaceutical giant Roche Holding.
Since inception in 2009 it has generated an average annualized return of 11.3%, compared with about 7.8% for the MSCI Europe Index.
Pictet Asset Management Global Megatrend Select
Focus: Mega trends including alternative energy
2019 Returns: 29.25%
Top Holdings: Visa, Thermo Fisher Scientific, Autodesk
For Hans Peter Portner, head of the thematic equities team at Pictet, the future is being shaped by a series of so-called mega trends. The firm focuses on 14 highlighted by the Copenhagen Institute for Futures Studies, including demographic development, urbanization and globalization.
But investors must stay alert: Themes within these trends are constantly evolving.
“We launched our fund at the peak of the first wave of investment in clean energy when this technology was not cost-efficient yet,” Portner said. “These assets depreciated quite a lot. We had to re-position the strategy to protect our clients’ investment by going more into energy efficiency.”
Since inception in 2008 it has generated an average annualized return of 11.5%, outperforming the MSCI World Index over that period, though it has underperformed on a five-year basis.
Lazard AM Global Thematic Focus Fund
Focus: Structural and secular changes transforming the global economy
2019 Returns: N/A
Top Holdings: Targeting companies with market cap above $1 billion
Lazard announced their thematic group back in 2003. The latest offering has a broad remit that will see it ride themes like digitization, environmental threats, societal anxieties and more.
The fund aims to fully integrate ESG concerns and will be run by the team behind Lazard’s Global Thematic Equity strategy, which the firm says outperformed the MSCI All-Country World Index by over 800 basis points in 2019.
This article was provided by Bloomberg News.