Optimism is returning to global economy say managers
As optimism about global economic recovery returns investors are looking at geographic diversification and long-term growth offered by global theme funds, fund managers say.
Among the managers who have recently reviewed their offerings are Alliance Bernstein, Newton Investment Management and Pictet. The longer-term theme funds favour investment firms with a broad geographic reach and depth of research, as well as highly specialist niche managers, such as Veritas Asset Management.
According to proponents of global theme funds, their advantages are primarily the unconstrained investing style, following neither indices nor benchmarks, and the ability to market to different types of investors, all of whom are attracted by the “blue sky thinking” of the grand ideas of tomorrow.
Most are closely linked to perceived generational demographic, socio-political and economic trends, or to transnational challenges such as climate change, food or water security. Some also identify worldwide opportunities in highly specialised areas, such as intellectual property or digital security. However, experienced managers warn a good theme can rapidly become over-valued, or not investable with sufficient quality of position.
Newton Investment Management has added a new theme to the house view for 2010 – More Government. In her annual review for investors, CEO Helena Morrissey said it was clear from ballooning GDP deficits and the fallout from the global financial crisis that governments around the world would be far more interventionist in many sectors.
Pictet says its “megatrends” funds are derived from analysis of global sectors subject to “persistent, secular changes in structural factors such as demographics, lifestyle, regulation and the environment”. The themes have evolved over time. In 1989, Pictet’s emerging market equities and European small caps funds were launched, followed by a Biotech fund in 1994, an Islamic fund in 1997, and a water fund in 2000.
Most of these themes are now accepted mainstream ideas, but at the time they were considered radical and innovative. Pictet’s present theme funds are dedicated to Premium Brands, Security, Clean Energy, Digital Communications, Timber and Agriculture.
Alliance Bernstein has just announced the European launch of its Global Thematic Research Portfolio, a Luxembourg Ucits III fund seeking long term capital growth by investing in a global universe of companies in multiple industries and sectors that stand to benefit from innovation.
It will target five themes with the potential to “transform industries and create significant investment opportunities”: Genomic Medicine, Web 2.0 (the Internet’s broadband revolution), climate change, the middle classes of emerging economies and heightened cyclicality, where stimulus efforts lead to a reshaped environment of cyclical opportunities.
“Identifying the technological, environmental, economic and social themes which will change the world and the companies best placed to benefit from them requires teams of analysts with deep expertise across different industries,” says Alliance Bernstein Portfolio CIO Catherine Wood.
“We are often early into our themes, particularly in the case of Genomics where technological advances are increasing at an exponential rate. Many fundamental analysts may not be inclined to do a huge amount of work on a story that may be a few years away from major investment inflows.
“This is where we can gain a competitive edge; by having one of the largest research teams in the industry, and by doing the work early.”
Thematic investing is considered to have a low correlation to traditionally managed equity portfolios. It can help diversify an overall investment strategy, enhance return potential and reduce risk. Alliance Bernstein notes that by taking a multi-themed approach, its Portfolio structure can avoid the volatility and higher risk often attached to single-theme portfolios, while maintaining the flexibility to add or drop themes as the investment landscape changes.
But the sector is already becoming crowded, with what are essentially benchmarked global equity funds or global sector funds claiming the status of a “megatrend” structures. Theme funds are conceptually different from global equity or global sector funds, taking a longer term view to exploit life-changing trends. If general equity funds are the weather, theme funds are the climate.
Once they grab the wider imagination, themed funds can help inflate sector bubbles. The “TMT” – telecoms, media and technology bull market at the end of the 1990s was a recent example.
Others were the proliferation of infrastructure funds across Europe from 2005 and the morphing of “ethical” funds into Socially Responsible Investing (SRI) funds and then into Environmental, Social and Governance (ESG) funds.
Julius Baer has just launched a biotech theme fund on the back of global revival it predicts for 2010, and in the US, healthcare reform and a growing patient population set to support earnings growth. The biotech and healthcare sectors underperformed in 2009 and now stand at a 17% discount to world equities, according to manager Nathalie Flury.
Further out she expects China to be a major growth opportunity. The government is aiming to provide health insurance to all by 2020, as well as building 2,000 new county hospitals, 30,000 new township health centres and 11,000 new urban health care centres.
“Growth drivers such as an ageing population, rapid urbanisation, rise of the middle class, increasing insurance coverage and improving access to healthcare mean that the Chinese government’s healthcare expenditure is expected to reach $0.9trn in 2010, up from $0.2trn in 2008.”
