Predicting Future Implications is Key to Successful Thematic Investing

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Predicting Future Implications is Key to Successful Thematic Investing

Managers need to distinguish long-term trends from short-term hype


August 2019, LONDON - A successful thematic strategy requires those at the helm to understand the impact of long-term political, economic, and social trends so as to uncover investable opportunities, according to the latest issue of The Cerulli Edge—European Monthly Product Trends Edition.


Thematic investing is not new, but its ambit is spreading as the concept evolves along with investors’ demands, says Cerulli Associates, a global research and consulting firm.Thematic investing has flourished in recent years as investors have increasingly paid attention to trends that are set to change the world, such as water scarcity, aging populations, healthcare, and technological advances.


“Thematic investment is not a short-term win. Once the themes have been uncovered, and the companies that will benefit, disrupt, or lead the way have been identified, patience is needed,” says André Schnurrenberger, managing director, Europe, at Cerulli.


He adds that there is heightened risk with a thematic approach. “The portfolio construction does not focus on past winners and therefore does not tend to feature benchmark heavyweights. It takes time for the themes to play out, while avoiding the distraction of short-term market noise and performance pressures. The reward is a benchmark agnostic, high-conviction investment portfolio, focused on those businesses that will dominate their field in the 2020s and beyond,” says Schnurrenberger.


Being able to distinguish long-term trends from short-term hype is vital to success. The approach to thematic investing varies between asset managers. For example, some firms have a “purity” overlay, which means that for a company to be considered, a sizeable percentage of its revenues and profits must be derived from that theme or activity; others focus on the specifics of businesses within a certain theme, investing in those that the firms believe will be future leaders in the field.


Over the past two decades, socially responsible investing and the criteria around environmental, social, and governance (ESG) have evolved and are now a foundation of many managers’ portfolios. Several asset managers have set up responsible investment teams to identify sustainability megatrends.

OTHER FINDINGS:

  • The cross-border market posted €21.1 billion (US$23.4 billion) of net inflows during June, bringing year-to-date (YTD) net outflows down to €13.3 billion, notes Cerulli in its analysis of the latest fund-flow data. Bond funds were largely responsible for the net inflows, attracting €19.3 billion in June. Emerging market bond funds posted €2.1 billion of net inflows during the month and €14.3 billion YTD. The demand for emerging market debt is being driven by low yields in developed markets and diversification benefits, says Cerulli. Many of the cross-border managers it spoke to noted the importance of specializing in the fixed-income space, specifically emerging market debt.
  • Germany’s fund industry posted net new flows of €41.9 billion during the first half of 2019, says Cerulli, quoting data published by the German investment funds association, BVI. Property funds were the best performers in the open-end retail fund market, posting inflows of €6.1 billion, whereas equity exchange-traded funds posted outflows of €2.1 billion during the period. Although ESG assets in Germany are still relatively limited, some 40% of the cross-border managers that completed a Cerulli survey anticipate rapid growth in such funds in the country’s retail and wholesale distribution channel.


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NOTES TO EDITORS:
These findings and more are from: The Cerulli Edge—European Monthly Product Trends Edition, August 2019 Issue.

 

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