A piece of the pie
thematic investing
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Editor's note
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They say variety is the spice of life, and nowhere is that more important than in the world’s ecosystems and biodiversity
Spice of life
ones to watch
The thematic funds and managers with the most juice
Sugar rush
The rapid growth of thematic investing in Asia cannot be ignored any longer
Investment professionals explain their selection criteria and ideal composition of thematic funds
Cream of the crop
CONTENTS:
audrey raj
editor, citywire asia
Thematic funds are becoming an increasingly important part of client portfolios. In this special supplement, we investigate how much diversification is needed for a fund to be successful and how impact investing can complement these strategies. The fund selectors Citywire Asia spoke to say a good thematic fund should have a number of sub-themes, with at least 50 to 80 stocks. The broader the theme, the more that can be gained from exposure, compared with a very niche theme that results in a small investable universe of 30 to 40 stocks. Technology-related themes are continuing to see increased interest, as well as healthcare, fintech, ageing populations, e-commerce, electric vehicles, millennial consumption and artificial intelligence. The selection criteria for a thematic fund should include more parameters than for a benchmark-oriented fund, recommends one selector, while another says track records matter less, partly because they are much shorter for thematic funds. There has been a growing number of thematic ETFs capable of making an impact. Biodiversity, ecology and waste management are also presenting some promising opportunities for investors keen to tackle environmental issues. All of this and more can be found on the following pages.
An active approach to thematic investing
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Investors in Asia are turning to thematic ETFs to capitalise on megatrends
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When selecting thematic funds, the onboarding criteria should be significantly different from that of traditional funds. The first question is really about the viability of the theme. While the disruptive trend may be real, how well does your investment approach align with the commercial success story? Is the disruption too early-stage? Are there enough companies in the investable universe? Is a high percentage of the company’s revenue being derived from the themes? It is also important to find the bridge between the theme and the beneficiaries. In essence, it is about intention versus materiality considerations; how well do managers’ actions align with what they say they will do? For a good thematic fund, we seek managers who have a lot of expertise in a sector. For example, we like to see ex-research professionals in the management or advisory teams when onboarding a biotech play as we recognise it as a specialist industry. A conviction-based approach is important as disruption stories create dispersion. Thematic funds should hold between 30 and 60 stocks to balance conviction with risk management. The analyst teams also need to be organised differently as dealing with new-age companies needs a different mindset in terms of risk and opportunity. Fund size discipline becomes material for more niche themes to retain the pure-play exposure due to market depth considerations. Track record certainly matters less, partly because it is inevitably much shorter for thematic funds. Similarly, we do not stress too much on benchmark selection as that is largely a loose reference. While UBP has an open-architecture approach towards onboarding funds, we have preferred using our internal equity resources to create custom portfolios (covering themes such as medical innovation, energy transition, electric cars, artificial intelligence, industry 4.0, new-age consumerism, etc) for our advisory clients. This has allowed us to control many of the factors I mentioned in a much better way, and as a result, we have delivered an exceptional experience to our clients. However, our research team have onboarded many third-party managers as well, and clients have invested in several of them directly and through our fund of fund vehicles.
chapter one
Aman Dhingra Union Bancaire Privée (UBP)
Thematic funds tend to be actively managed, therefore it is important to understand where the returns are derived and whether alpha is generated from idiosyncratic returns rather than certain factors or biases in the portfolio construction. Moreover, the drivers of performance can be different for various types of thematics – a dividend fund may be very different from an innovation fund in its process, philosophy and implementation. The selection criteria for a thematic fund should include more parameters than for a benchmark-oriented fund. First, the theme should be sufficiently broad to ensure a large enough investment universe. Second, the theme should be in line with a secular trend and not a short-term fad. Third, the theme should require specialist knowledge that the manager has proven to wield effectively in generating alpha. While it is often the case that fund selection requires peer group benchmarking, it is important to note that it is very easy to put a thematic fund into an inaccurate group due to the naming convention used by the asset managers. Therefore, assessing peer group comparison can become more of an art than a science. A good composition of a thematic fund tends to be benchmark agnostic. It should help investors buy into securities that will become the future leaders of their industry and possess disruptive potential. The portfolio managers who are responsible for security selection should be knowledgeable in that particular theme, ideally supported by analysts with specific industry experience. Their in-depth expertise can help separate the wheat from the chaff. It’s best to avoid managers who are generalists or just starting to manage thematic funds due to popularity. Likewise, funds that have been repurposed or rebranded to become a thematic fund should be viewed with caution.
Wei Mei Tan Endowus
Laurent Lequeu Lumen Capital Investors
At Lumen Capital Investors, we have historically invested our clients’ portfolios in themes that are shaping tomorrow’s world. When we select thematic funds or ETFs, we look at products that are positioned in the theme in an extensive way. As we are also investing in the theme’s largest names, the thematic fund has to offer a diversified and dynamic exposure and focus on a myriad of smaller-cap companies that have been picked by the fund manager. We have noticed that different fund managers have different ways of investing in the same theme. A good thematic fund or ETF is not overweight the mega-caps of the sector. For growth themes, the active management of the thematic fund is particularly key for delivering sustainable alpha for investors over the long term and will also provide an edge for the fund manager compared with potential passive investment products on the market. Therefore, we would be ready to pay a slightly higher management fee to benefit from the fund manager’s know-how in the theme.
Kenneth Yuen EFG Bank
The portfolio has to demonstrate how well a fund tracks the theme. It is vital to understand the return drivers and the key risks represented in the theme. How the portfolio is implemented is also important as some of the themes might look presentational but might not be able to capitalise on it through the capital market. There is also no promise that those companies stand positioned to benefit from the theme. Furthermore, a robust theme should be logical, as well as having a compelling story behind it, with quantitative figures to support the case.
John Ng DBS Private Bank
Our criteria generally includes a review of the fund manager’s experience, team structure, investment process, security selection, ESG considerations, portfolio risk management and performance track record. Practical issues such as size, liquidity, tenure of the fund (or strategy) are also considered. Where we take a more critical review would depend on the thematic fund’s investment coverage. In general, a very narrow theme within a sub-industry (or sub-sector) – or countries with smaller market capitalisation and lower liquidity – would require greater consideration and scrutiny. We look at these narrower markets as more tactical opportunities. Thematic funds that are too narrow in investment scope may not provide much opportunities for active management against a relevant benchmark, since there may only be a few companies within its scope. In fact, there may not even be an appropriate benchmark for some of these nascent themes and sub-sectors. The purity of the theme, therefore, comes into question: Is it true to label? With so many thematic funds being launched for asset gathering, some may not fully capture the themes they claim to. We prefer thematic funds that have a broader underlying sector or geography and multiple themes or sub-sectors. These tend to have many more liquid companies that are engaging in areas of interest, providing greater room for active management and potential outperformance.
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The rapid growth of thematic investing in Asia cannot be ignored any longer Thematic investing’s popularity over the last few years has been gathering serious pace. According to Morningstar, in the three years to the end of March, assets under management in thematic funds more than tripled worldwide from $174bn to $595bn. This is 2.1% of all assets invested in equity funds globally, up from 0.6% 10 years ago. And while Europe makes up the largest market for thematic investing, Asia is a booming environment, driven by growing investor interest combined with regulatory pressures, behavioural shifts, technological innovation and ESG integration. ‘The acceptance and adoption of thematic investments by investors in Asia has been overwhelming and it will not be a surprise to find Asia at the forefront of thematic trends in years to come,’ said Benny Gay, head of intermediary clients for Asia at Vontobel Asset Management. Indeed, Asia’s young population, a growing, educated and talented middle class, and strong technological innovation will further spur interest and momentum, said Andy Budden, investment director at Capital Group. Meanwhile, China’s significant market size, middle class and technological prowess, India’s embracing of fintech, mobile banking and e-commerce, and Southeast Asia’s fast-growing economies and distinctive demographics also make for fertile thematic markets.
words by Neil Johnson
chapter two
It will not be a surprise to find Asia at the forefront of thematic trends in years to come
Benny Gay, Vontobel Asset Management
For Vontobel’s Gay, thematic investing’s goal is to invest in companies that improve lives, minimise carbon footprints and perform well financially. It’s a strong mix of established and new companies offering innovative products that present attractive investment opportunities, unsurprisingly with many of these in the environmental space. ‘Environment-related sub-sectors like water quality, low-emission transportation, clean energy infrastructure, smart building technologies, product lifecycle management and energy efficiency solutions in industry, which are aligned with the UN Sustainable Development Goals 6, 7, 9, 11, 12 and 13, offer interesting prospects to investors interested in returns and contributing to solving environmental challenges,’ he said. Underpinning the majority of themes – as it ultimately provides solutions to some of the world’s biggest challenges – is technological innovation. Steve Freedman, head of research and sustainability for thematic equities at Pictet Asset Management, said: ‘This ranges from solutions to climate change, including renewable energy or energy efficiency contributors in industry, buildings and transport, to investments focusing on restoring and preserving health (eg healthy foods), promoting education or solving challenges of urbanisation. We also see large potential for digital transformation plays that contribute to business efficiency gains as well as individual convenience.’
For Patrick Ho, CIO for North Asia at HSBC’s private banking and wealth management business, security, defined as the state of being free from danger or threat, is also key to better societies. ‘All too often, this is perceived narrowly as a concept, involving criminal activities. However, to us and other investors, security is of paramount importance to most people in every aspect of their lives, whether that is safety of their person, family, assets, job, culture, way of life or digital data.’ In Asia’s consumer technology space, Daryl Liew, CIO of Reyl Singapore, believes that while established names such as Tencent, Xiaomi and Ping An Good Doctor will continue to benefit from consumer uptake: ‘Higher capital expenditure to develop domestic tech capabilities will benefit companies like Taiwanese factory automation company Airtac, while rising Asian middle class could benefit companies like online gaming and e-commerce player SEA Ltd.’ A spoonful of ETFs Thematic ETFs have been especially popular, with AUM more than doubling in 2020. ‘All our thematic indices outperformed the MSCI World Index in 2020. Investment strategies focusing on renewable energy and battery technology have, in particular, shown a strong performance. On average, the thematic indices outperformed the MSCI World Index by more than 35% in 2020,’ said Aude Martin, ETF investment specialist at Legal & General Investment Management (LGIM).
More funds, more themes This is encouraging the range of global thematic funds to grow significantly too, with a record 237 new funds debuting worldwide in 2020, up from 167 in 2019, taking the total that Morningstar tracks to more than 1,270. Then there’s the plethora of themes that can be seen in how asset and wealth managers tackle the sense-making process. Some focus on themes in broad terms: climate, technology, health, demographics, infrastructure, digital transformation, sustainability and innovation. But the array of opportunities can really be seen when looked at more granularly: digital payments, e-commerce, electric vehicles (EV), artificial intelligence (AI), cybersecurity, semiconductors, ageing, Gen Z, 5G and splinternet, to name a few. The DBS chief investment office communicates its thematic strategy via its Idea acronym: innovators, disruptors, enablers and adapters, which focuses on technology sectors such as semiconductors, 5G, EV, cloud and e-commerce. ‘We are excited about the trend of the world becoming a digital economy, which has been accelerated by Covid-19. Idea represents the types of companies that will be winners in this new digital world. These companies have seen their stock prices surge and we expect this trend to continue,’ said Hou Wey Fook, CIO at DBS Bank. Beyond digitalisation, Wey Fook also recommends holding equities that ride the secular trends of ageing, millennial consumption and sustainability. ‘These are irreversible trends that will continue to play out in the long term. For example, sectors relating to ageing population (eg healthcare and automation) and millennial consumption trends (eg e-sports and athleisure) have emerged as key beneficiaries from the secular wave.’
Positions that have performed well for Pictet over the last year have included forest and wood product companies, as well as power semiconductor names – critical building blocks of the transition to a low-carbon economy. ‘Also, plays on a digital future, like data centre owners, industrial design software companies or digital payment names that are benefiting from the secular shift away from cash to online and mobile payments as well as e-wallets. We also have significant exposure to waste management names, which are playing an increasingly important role in the shift toward a circular economy,’ said Freedman. And while investor focus will likely remain fixed on environmental challenges, Freedman also expects social themes to increasingly take centre stage. ‘The Covid-19 crisis has emphasised the need to promote healthier lifestyles as prevention against future pandemics. Health and nutrition are therefore two themes that are likely to experience solid tailwinds. ‘At the same time, the massive social costs of the crisis suggest a focus on investments that promote quality-of-life factors. Two themes that stand out in this respect are smart city, which invests in business models that alleviate challenges of urbanisation, and human, which emphasises human-focused services that enable individuals to live more fulfilling lives and positively shape society across areas such as education, the care industry, and leisure and entertainment.’
We are excited about the trend of the world becoming a digital economy, which has been accelerated by Covid-19
Hou Wey Fook, DBS Bank
LGIM’s thematic approaches can give greater weight to small- and mid-cap stocks, said the group’s head of ETFs, Howie Li. ‘Indices built only according to market capitalisation give the greatest prominence to the largest stocks, which can be the incumbents most at risk of disruption from emerging pioneers in themes. ‘For these reasons, thematic strategies can form the building blocks of growth portfolios. Growth investors have always sought exposure to themes, but these allocations can now be made more precisely than through other portfolio tools.’ The L&G Battery Value-Chain Ucits ETF holds 50.5% of Asia-domiciled companies such as GS Yuasa, Sebang Global Battery or Delta Electronics, which are at the forefront of battery technology innovation. The L&G Clean energy Ucits ETF holds 30% of Asia-domiciled assets, demonstrating a strong participation in the clean energy value chain.
They say variety is the spice of life, and nowhere is that more important than in the world’s ecosystems and biodiversity Most people are sympathetic to making investments for the good of the world. But a lingering concern remains around whether pursuing sustainable and impact investments hurts performance. ‘But we would argue that companies with superior ESG practices (good corporate governance, for instance) are better managed and better positioned to achieve strong business and investment outcomes in the long run,’ said Patrick Ho, CIO of HSBC’s private banking and wealth management business in North Asia. Marc Lansonneur, head of managed solutions, balance sheet products and investment governance at DBS Wealth, agreed. ‘It’s not true that returns will be compromised in thematic or impact investing. Rather, they have a dual focus of achieving financial outperformance while also doing good and can help to generate alpha in the long term.’ The desire to do good through an investment is a powerful notion, one that has become easier to achieve via the expanding universe of thematic funds, the majority of which are focused on making lives and the environment better through change. This is especially notable in the growing number of thematic ETFs capable of making an impact. Legal & General Investment Management’s (LGIM) range is borne from three broad areas: technology (artificial intelligence, robotics and automation, and cybersecurity); energy and resources (battery value-chain, clean water, hydrogen economy and clean energy); and demographics (e-commerce logistics, healthcare, pharmaceuticals and digital payments).
chapter three
To invest in biodiversity, one needs to reduce the direct drivers of biodiversity loss
Hartmut Issel, UBS
‘For example, the L&G Battery Value-Chain Ucits ETF supports the clean power generation revolution through energy storage technology development. The L&G Clean Water Ucits ETF has a direct impact on ecology and biodiversity. Water scarcity affects four out of 10 people and use is growing at twice the rate of the population – $7.5-23.1tn in investments will be needed for water infrastructure and technology by 2030,’ said Howie Li, head of ETFs at LGIM. At its core, an impact is achieved through investing in enterprises whose goods and services seek to address the world’s greatest social and environmental issues. ‘A thematic perspective provides a lens through which one can categorise these investable companies. No one particular theme will solve the great world problems as identified by the UN Sustainable Development Goals,’ said Eric Rice, head of impact investing at BlackRock. In 2020, sustainable investing accelerated amid very strong performance in sectors such as green energy and electric vehicles, as well as public health due to Covid-19. Looking ahead, Rice expects the increased global commitment to achieving net-zero emissions to result in a broader range of impact solutions that address problems faced across the global economy. ‘As the space of sustainability evolves, we will need solutions in digitisation and electrification to address the shift across all sectors to cleaner sources of energy and the efficient management of energy usage. Pollution remediation and sustainable food sources will also be important areas, as will green infrastructure development as economies look to build back better and greener in a post-Covid-19 world,’ he said.
Planetary boundaries While the energy transition will remain the major theme for some time to come, making a positive impact on the world’s ecology and biodiversity is also vital, though a little more complicated. ‘When investing for impact in ecology and biodiversity, it’s important to think about our ecological system as a whole and how the different dimensions interact. Investing for positive impact in climate change, for example, is usually more straightforward because we know the main driver is the release of greenhouse gases into our atmosphere, and the main driver of this is the burning of fossil fuels in our energy system,’ said Jennifer Boscardin-Ching, client portfolio manager of thematic equities at Pictet Asset Management. ‘However, for biodiversity, it is more complex. We cannot really compartmentalise biodiversity on its own, because it’s impacted by all other environmental issues that act as drivers of biodiversity loss – climate change, land-use change, intensive agriculture, pollution, etc. So, to invest in biodiversity, effectively one needs to reduce all these other direct drivers of biodiversity loss.’ The companies the Pictet Global Environmental Opportunities fund invests in provide environmental solutions that reduce negative shocks on biodiversity. ‘After all, nature is resilient, and if it’s left alone and we reduce the negative shocks to the system, nature can recover on its own,’ said Boscardin-Ching.
Nature-positive transitions are estimated to bring $10tn in business value and create 395 million jobs
Paul Milon, BNP Paribas Asset Management
The Global Environmental Opportunities fund grounds its investments in the nine planetary boundaries, a scientific concept that establishes nine environmental dimensions that are crucial for life to continue on earth, such as climate change, chemical pollution, biodiversity, land use, ozone depletion and ocean acidification. Within each dimension is a boundary or ‘safe operating space’, where human activity can continue without irreversibly damaging the earth’s environmental systems. ‘We use planetary boundaries as an environmental exclusion framework to screen out sectors or industries that are large drivers of biodiversity loss – ie economic activities that have an overly negative impact on land use, climate change, pollution, etc. At the same time, we invest in companies that offer solutions that provide a positive impact on these dimensions,’ said Boscardin-Ching. Modern agricultural and farming practices are one of the largest contributors to biodiversity loss through deforestation, land and sea use change, and nitrogen/phosphorus fixation. For example, largescale deforestation is being caused by cattle ranching for the beef industry. In this area, Pictet sees new, more sustainable food technologies reaching maturity to counter such negative impacts. ‘For example, plant-based meat is now turning mainstream and advanced enough to successfully start replacing beef and chicken in the most popular fast-food chains and in stores. This would have a positive impact on several environmental dimensions because plant-based protein alternatives have a significantly lower environmental footprint (in terms of emissions, water and land use) than the beef industry, for example,’ Boscardin-Ching continued.
Waste not An impact can also be made by investing in companies that offer solutions to improve waste management systems and that produce more sustainable and recyclable packaging materials, such as wood fibre. ‘Plastic waste has a direct and deadly effect on wildlife and biodiversity – for example, through thousands of seabirds, sea turtles, seals and marine mammals being killed each year after ingesting or getting entangled in plastic. The United Nations Environment Programme estimates more than 800 marine species are being affected by marine plastic litter and pollution, so addressing this area through proper waste management and reduction would have a positive impact on biodiversity as well,’ she said. Tackling biodiversity and nature loss is unarguably essential, but it’s also a task that brings a huge investment and business opportunity. ‘Half of global GDP is threatened by nature loss. On the investment opportunity side, nature-positive transitions are estimated to bring $10tn in business value and create 395 million jobs. We’ve been a pioneer in launching innovative environmental thematic solutions covering themes such as water, sustainable food, environmental equities or blue economy,’ said Paul Milon, head of stewardship for Asia-Pacific at BNP Paribas Asset Management. Indeed, in May, the manager launched a biodiversity roadmap to further articulate its approach to addressing biodiversity challenges in its investments. Milon said that – in line with the UN Decade on Ecosystem Restoration that began on World Environment Day in June – BNP Paribas launched an ‘innovative strategy investing in companies addressing the need to prevent, halt and reverse the degradation of ecosystems on every continent and in every ocean’. ‘We believe this represents sizeable investment opportunities as aquatic, terrestrial and urban ecosystem restoration is estimated to represent $6tn in annual business opportunities and $2tn in annual capital investment over the decade to 2030,’ he said.
by Alexandra Stanciulescu, Simone Borsetti and Thomas Wilding
Ones to watch
chapter four
Allianz Global Investors’ Sebastian Thomas was awarded an A rating in May, after originally breaking into the Citywire ratings last December. His performance was based on the Allianz Global Artificial Intelligence fund, which he has managed since 2017. Over three years to the end of April, Thomas provided a return of 153.3%, while the comparative index generated a return of 115.8% in US dollars. The average manager in the Equity – Robotics & AI peer group returned 81.7% over the same period. According to the latest factsheet, the fund’s geographical exposure was mainly to the US (93.3%), with a small portion of investments in the Netherlands (2.3%) and Canada (2%). The fund’s top holdings include digital media-player manufacturer Roku (5.20%), Tesla (4.87%) and Amazon (3.88%).
Sebastian Thomas Allianz Global Investors
Manager ratio: 0.48 Three-year ranking: 1/20 Sector: Equity – Robotics&AI Benchmark: MSCI World/ Information Tech Manager TR: 153.3% Average Manager TR: 81.7% Benchmark performance: 115.84% Currency: USD
James Govan recieved his fourth consecutive + rating in May for his work on the Barings Global Agriculture fund, alongside fellow managers Piers Aldred and Clive Burstow. Govan joined Barings in 2008 and also manages the Barings Global Resources fund. He has worked in the industry since 2002. The Barings Global Agriculture fund is ranked first out of 10 funds in the category for its total return over three years, 46.9% in US dollars. This is compared with the average manager’s 33.5% over the same period. Stocks make up 97.3% of the fund, which aims to achieve capital growth by investing in companies from across the agricultural value chain. Out of 35 holdings, as of the end of April, the top three were Corteva (7.53%), Deere (7.38%) and Archer-Daniels-Midland (7.03%). The fund is registered for sale in nine countries, including Hong Kong, Macao and Taiwan.
Manager ratio: 0.06 Three-year ranking: 1/10 Sector: Equity – Agriculture Benchmark: FSE DAXglobal Agribusiness Manager TR: 46.9% Average manager TR: 33.51% Benchmark performance: 46.94% Currency: USD
Simon Webber Schroders
Schroders portfolio manager Simon Webber has been awarded a AAA rating. Webber initially broke into Citywire’s ratings in 2009 and has been constantly rated since 2017. Based in London, he is a lead portfolio manager of global and international equities at Schroders, which he joined in 1999. Among the four funds he managers, one is available to investors in Asia. The Schroder ISF Global Climate Change Equity fund sits in Citywire’s recently created Equity – Ecology sector. He developed this fund alongside Matthew Franklin and has been managing it since its inception in 2007. Over three years to the end of April, the fund returned 77.9% in US dollars, compared to 51.6% from the average manager. The fund has a higher exposure to industrials (35%) compared with its relevant index, MSCI World, which has only 11%. Among the top holdings are the multinational conglomerate Alphabet (4.0%), Amazon (3.5%) and wind turbine company Vestas Wind Systems (2.1%).
Manager ratio: 1.13 Three-year ranking: 8/66 Sector: Equity – Ecology Benchmark: MSCI World Manager TR: 71.4% Average manager TR: 51.64% Benchmark performance: 50.94% Currency: USD
James Govan Barings
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Allianz Thematica continually evolves to capture the investment opportunities that arise from structural shifts. As the world changes, structural shifts are abundantly clear. Many investors want to capitalise on them, but which trends have the greatest potential? Identifying the best growth opportunities in a theme and then on a stock level is a job for skilful and experienced active managers. Urbanisation, technological innovation, resource scarcity, demographics and social change are among the most powerful megatrends shaping our society. ‘What all of these things have in common is that they’re predictable – they allow us to predict where they can accelerate and give rise to a theme,’ says Andreas Fruschki, portfolio manager of Allianz Thematica. Megatrends by their very nature do not play out overnight. They often move at glacial speed over the very long term – 20 to 100 years. They tend to be too vague to be investable. Pinpointing themes within megatrends – and, indeed, topics within themes – makes them ripe for investment by active managers like Allianz Global Investors. We view themes as having a range of applications, topics and end users and a time horizon of five to 20 years. ‘Even within these themes there are certain areas that we give more priority to than others – where the acceleration has already kicked in,’ says Fruschki, the longest-tenured manager on the strategy and manager alongside Gunnar Miller. ‘That is where active management comes in. Rather than just picking the theme, there are a lot of things that happen within that theme that play to our strength as active managers.’ One theme within technological innovation that Fruschki and his team currently likes is the digitalisation of life. It is a megatrend that has grown exponentially but one that is continually evolving – so, too, is our exposure to it.
1 Source: Morningstar, 18 January 2021. (https://www.morningstar.co.uk/uk/news/208785/the-rise-of-thematic-etfs.aspx) 2 Source: Allianz Global Investors, June 2021. There is no guarantee that these investment strategies and processes will be effective under all market conditions and investors should evaluate their ability to invest for a long-term based on their individual risk profile especially during periods of downturn in the market. 3 Source: Allianz Global Investors/IDS GmbH, as at 31 May 2021. Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice. No offer or solicitation to buy or sell securities and no investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this advertisement but should seek independent professional advice. However, if you choose not to seek professional advice, you should consider the suitability of the product for yourself. The above information is used for the purpose to demonstrate the Fund's investment strategy only, it is not a recommendation nor investment advice to buy or sell any shares of securities. Past performance of the fund manager(s) and the fund is not indicative of future performance. Prices of units in the Fund and the income from them, if any, may fall as well as rise and cannot be guaranteed. Distribution payments of the Fund, where applicable, may at the sole discretion of the Manager, be made out of either income and/or net capital gains or capital of the Fund. As a result of the payment, the Fund's net asset value is expected to be immediately reduced. The dividend yields and payouts are not guaranteed and might change depending on the market conditions or at the Manager's discretion; past payout yields and payments do not represent future payout yields and payments. Investment involves risks including the possible loss of principal amount invested and risks associated with investment in emerging and less developed markets. The Fund may invest in financial derivative instruments and/or structured products and be subject to various risks (including counterparty, liquidity, credit and market risks etc.). Past performance, or any prediction, projection or forecast, is not indicative of future performance. Investors should read the Prospectus obtainable from Allianz Global Investors Singapore Limited or any of its appointed distributors for further details including the risk factors, before investing. This advertisement has not been reviewed by the Monetary Authority of Singapore (MAS). MAS authorization/recognition is not a recommendation or endorsement. The issuer of this advertisement is Allianz Global Investors Singapore Limited (79 Robinson Road, #09-03, Singapore 068897, Company Registration No. 199907169Z).
We only invest in companies that are pure play beneficiaries of structural long-term trends
They accounted for more than half of a record €9.5 billion net inflows into European thematic exchange-traded funds over the course of a turbulent 2020, according to a report by Morningstar. [1] Three levels While the size and scope of passive thematic funds reflects growing demand, we believe being active when investing in themes is important. Allianz Thematica is actively managed on three different levels. The team seeks to identify firstly, investable structural megatrends and the themes within them; secondly, the topics of interest within those themes; and thirdly, the stocks that will benefit from those themes more than others and generate alpha for our investors over a two to five-year period. ‘We’re picking the theme, we’re picking the topic within the theme, we’re actively picking the stocks within the topics constantly,’ says Fruschki. ‘We’re looking at where are the best stocks, tied to the best topics, tied to the best themes, and we’re constantly reviewing that.’ The resultant portfolio has around 200 global stocks spread across five to seven themes, with each theme having a weight of between 5% and 25% and being represented via a basket of 15 to 30 stocks. [2]
But these are not the only developments the managers are invested in. The other four themes in the portfolio at present are health tech, clean water and land, artificial intelligence and the pet economy. ‘It’s a combination of themes that you can explain within three minutes to anyone who’s wondering, “am I participating in these types of trends?” If the trend is valid, investable, comes with the right valuation and fits into the portfolio then most likely it will be included in Allianz Thematica, but not all the time,’ says Fruschki. ‘By and large, we change one or two themes every year. That doesn’t mean these themes are no longer valid or aren’t happening, but it might mean we’ve found something better, the macroeconomic environment has changed or maybe a theme has been overvalued.
Andreas Fruschki, CFA Head of Thematic Equity, Allianz Global Investors
A decade ago, digital life manifested itself in the rise of the internet, social media and smart phones; today, it is evident in areas like cyber security, digital finance and, more recently, remote working amid the coronavirus pandemic. Demand for connectivity and energy transition-themed investments led a boom in flows into thematic funds last year .
Allianz Thematica: Portfolio allocation overview, April 2021
The investment team continually tilts the portfolio to the most attractive parts of the market with the greatest growth potential, rotating into new themes as older ones peak and the best of the returns have been harvested. Six themes that were reflected in the fund when it launched in 2016 – education, safety and security, the impact of China, the factory of the future, the car of the future and healthy lifestyle – have since given way to new themes like next generation energy, the booming pet-care market, technology in healthcare and, most recently, infrastructure.
In early April, the team replaced the education theme with the new theme of infrastructure. It is now the second largest theme in the portfolio behind digital life and just ahead of next generation energy. The timing is deliberate: as the economy emerges from Covid-19, governments are poised to invest billions of dollars in infrastructure. At the same time, the upgrading of aging infrastructure has become a political instrument of choice.
‘There are lots of reasons why a theme might go out of the portfolio. It could theoretically be re-included later but right now these are the themes that we think make the most sense.’ Pure play beneficiaries The fund seeks to provide investors with capital growth and a monthly income from a portfolio that participates in the opportunities arising from the most predominant long-term fundamental changes. It is benchmarked against the MSCI All Country World index and has delivered a significant margin of outperformance against it over the longer term. [3] The managers are unconstrained by region, sector or market capitalisation, allowing them to pick the most promising companies globally. They invest in companies whose business activities can be clearly assigned to a theme while retaining broad diversification across a range of stocks, themes and megatrends. ‘We only invest in those companies that are pure play beneficiaries of structural long-term trends,’ says Fruschki. On one hand, diversification helps to stem losses in down markets and on the other, targeted exposure helps to avoid dilution of themes. A growing band of investors are using the fund as a core part of their global equity exposure. With Allianz Thematica they get exposure to global equities and exposure to compelling themes alongside enough diversification to not overspend on their risk budget.
Read more on Allianz Thematica here.
Thematic exchange-traded funds (ETFs) offer Asian investors an efficient and cost-effective way to gain exposure to opportunities created by the global megatrends reshaping our economies and societies, say industry experts from BlackRock. Megatrends are powerful, transformational forces with the ability to change the way we live and work, possibly forever and BlackRock has identified five such megatrends: climate change and resource scarcity; demographics and social change; shifting economic power; rapid urbanisation; and technological breakthroughs. [1] And as investors look to generate healthy returns over the long term by capitalising on the opportunities created by the confluence of these megatrends and the resultant disruption, they are increasingly turning to thematic ETFs, which are ideal for this purpose, according to two senior executives at BlackRock. “These megatrends are the key drivers behind thematic investing, which we believe will chart the future,” said Claire Cheng, product strategist of iShares Investment Strategy and Product Consulting for Asia Pacific at BlackRock. “This is particularly true for investors in Asia Pacific, a fast-growing region full of emerging markets and where an abundance of innovations can be found.” How thematic investing for megatrends works For a number of reasons, thematic ETFs are convenient instruments to make the most of these megatrends. Firstly, their targeted approach allows investors to gain exposure to specific groups of stocks well-positioned to benefit from these megatrends and outperform the broader market in the long term. Such a cross-sectional investment strategy allows investors to pick broad themes with the potential for exponential growth without having to pick single-stock winners. ETFs are also easy to own and help diversify investor portfolios as they are distinct from broad market and factor exposures. That means they can be viewed as alternatives that complement exposure to individual stocks or sectors. [2]
1 Source: BlackRock: “What are Megatrends”; June 2021 https://www.blackrock.com/hk/en/investment-ideas/themes/megatrends [Accessed 18 June 2021] 2 Source: BlackRock: “Own the future of innovation”; data as of May 2020. 3 Source: BlackRock; data as of 8 June 2021. 4 Source: BlackRock: “Thematic investing with BlackRock and iShares”; June 2021 https://www.blackrock.com/uk/individual/themes/thematic-investing/explained [Accessed 18 June 2021] 5 Source: CNBC: “Apple becomes first U.S. company to reach a $2 trillion market cap”; 19 August 2020 https://www.cnbc.com/2020/08/19/apple-reaches-2-trillion-market-cap.html [Accessed 18 June 2021] 6 Source: BlackRock: “A PM’s take on Megatrend ETFs”; https://www.ishares.com/us/insights/etf-trends/thematic-investing-with-etfs [Accessed 18 June 2021] 7 Source: BlackRock: “A sea change in global investing”; April 2021 https://www.ishares.com/us/insights/etf-trends/how-climate-change-will-impact-portfolios [Accessed 18 June 2021] For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass. 8Source: Globe Newswire: “Electric Vehicle (EV) Market Worth $2,495.4 Billion by 2027..."; data as of May 2021 https://www.globenewswire.com/news-release/2021/05/11/2227050/0/en/Electric-Vehicle-EV-Market-Worth-2-495-4-Billion-by-2027-Growing-at-a-CAGR-of-33-6-From-2020-Exclusive-Report-by-Meticulous-Research.html [Accessed 18 June 2021] For illustrative purpose only. Subject to change. There is no guarantee that any forecast will come to pass. 9 Source: BlackRock; data as of 5 May 2021. 10 Source: BlackRock: “Capturing robust growth opportunities in the technology sector”; data as of June 2021 https://www.blackrock.com/sg/en/insights/growth-opportunities-in-technology-sector [Accessed 18 June 2021] This material is prepared by BlackRock and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of June 2021 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In Singapore, this material is issued by BlackRock (Singapore) Limited (company registration number: 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.The information provided here is not intended to constitute financial, tax, legal or accounting advice. You should consult your own advisers on such matters. BlackRock does not guarantee the suitability or potential value of any particular investment. Investment involves risk including possible loss of principal. Past performance is not an indication for the future performance. The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to fluctuate. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. ©2021 BlackRock, Inc. All Rights Reserved. BlackRock® is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners. MKTGM0621A/S-1694575
Claire Cheng Product strategist, iShares Investment Strategy and Product Consulting, Asia Pacific, BlackRock
Georgina Mitchell iShares specialist, Asia ex-Japan Wealth Distribution, BlackRock
ETFs allow investors and portfolio managers to focus on sectoral allocation, which offers greater diversification and exposure
“ETFs are transparent, liquid and cost-efficient vehicles that allow investors and portfolio managers to focus on sectoral allocation, which offers greater diversification and exposure than a simple stock selection approach,” said Georgina Mitchell, iShares specialist for Asia ex-Japan Wealth Distribution at BlackRock. Yet another reason thematic ETFs are a preferred way of gaining exposure to megatrends is their access to market information. “In the past, megatrends were only accessible to active managers with large teams of dedicated analysts focusing on various stocks. But ETFs allow investors to gain exposure to long-term themes in a systematic way and that’s purely because of the improved access to data,” Mitchell said. BlackRock, which launched its first thematic ETF in 2007, has harnessed its longstanding history of managing precision equity funds to enhance its thematic portfolio with over USD30 billion in assets under management (AUM) spanning approximately 30 product platforms over 20 different investment themes. [3] Also, BlackRock’s Thematic Research and Investment Group (TRIG) leverages its vast research and data analytics capabilities to identify long-term themes driven by the five megatrends. [4] Being early is key Indeed, data is critical for recognising the right trends and investing early. For example, Cheng noted, people who invested in smartphone companies in their early days enjoyed the rapid scale achieved by this innovative product in a very short period of time. [5] “All the trends happening now – clean energy, electric vehicles (EV), aging population – have the potential to bring about the next revolution, just like smartphones.” Accurately identifying trends on time involves looking for the presence of three seminal forces – regulatory, societal and economic – that commonly drive megatrend opportunities, according to Cheng. “Those who are able to identify these trends early can invest early and potentially earn a very good return.” This is precisely what thematic investing enables. With the help of indexes linked to multiple megatrend themes across sectors, geographies and company sizes, investors can gain exposure to long-term structural forces instead of short-term cyclical ones, and position themselves early to invest in products, businesses and industries driving long-term change. [6] In the fast-growing EV industry, for instance, such a cross-industry investment approach would allow investors to build exposure to companies up and down the value chain – from battery makers to auto parts manufacturers to software companies that write the algorithms operating these components. Future focus: Sustainability and technology Looking ahead, BlackRock identifies sustainability and technology as the two main megatrends to follow, pointing out that a growing awareness of the risks posed by climate change – a concern exacerbated by the pandemic – is expected to drive fund flows into companies focused on or straddling these sectors, such as renewables and EVs. The move to a net zero global economy is expected to require investments worth as much as $100tn while the EV market, which is influenced by both the tech and climate megatrends, is expected to be worth nearly $2.5tn by 2027. [8] For example, the world’s largest clean energy ETF has seen its AUM expand from $437m to $5.95bn in just over a year. [9]
Megatrends are the key drivers behind thematic investing, which we believe will chart the future
These examples hint at the enormous potential for investors to grow their wealth in the years to come by focusing on megatrends. At the same time, other areas of the technology sector, which have received a huge boost from the pandemic, as well as the ongoing post-pandemic recovery itself are set to offer a range of compelling investment opportunities. “The pandemic has increased demand for technology infrastructure so that will mean more interest in areas like artificial intelligence (AI), cloud computing and robotics,” noted Cheng. Clearly, investors in the region are paying attention. According to Mitchell, while the US continues to be the primary market for megatrend ETFs their popularity is growing quickly in APAC. “Of course the numbers in APAC are much smaller but thematic investing is definitely becoming a key component of investor portfolios,” she said, pointing out that investors in the region who have so far been focused on technology are now joining their counterparts around the world to broaden their outlook and incorporate renewables and clean energy themes into their portfolios. Cheng concurred, attributing the region’s growing embrace of thematic ETFs to their ability to enhance investor access to megatrends in an efficient and cost-effective way. “Investors are starting to notice that thematic investing provides more targeted exposure to niche areas, as well as realising their benefits versus investing in more traditional, broader investment themes.” Investing in megatrends with ETFs ETFs could be a convenient way for investors to invest in megatrends. The simple building block nature of an ETF allows investors to effectively diversify their existing portfolios by adding specific market and/or industry exposures. Other benefits of ETFs include: • • • •
Transparency: ETFs are relatively straightforward and transparent in their investment objective, as well as mostly transparent in their holdings Accessibility: ETFs offer access to market exposure of a variety of asset classes, both broad and specific Liquidity: ETFs tend to be highly liquid, and can be bought and sold during the trading day Cost efficiency: ETFs generally have lower management fees compared to active funds invested in the same markets and/or assets
