Thematic investment as a tailwind for success

Joshua Pond is a technical investment writer at Rowan Dartington.

The past year has seen the re-emergence of thematic investment to the agenda. 

As returns from other strategies have dwindled, many investors have looked to take advantage of strengthening trends during the global pandemic and the technologies, or sectors they felt would be on an upward trajectory over the coming years of recovery.

This is far from an exact science, but you don’t necessarily need to pick out the winners of a trend yourself. 

Renewed interest: The past year has seen the re-emergence of thematic investment to the agenda

Buying a fund, ETF or group of direct equities that have specific exposure to the theme in question is often the best approach. 

Having exposure to a strong underlying theme can act as a tailwind for success and a good return on investment. So what are the themes you may want to consider for your portfolio next?

Ageing population

Over time, the demographics of certain countries and regions have been progressively shifting towards an ageing population. 

In particular, World Bank data highlights that countries in Western and Central Europe and Japan have the highest percentage of their populations over the age of 65. This shift is intrinsically linked to two key factors – falling birth rate and increased life expectancy.

Key areas that this mega trend captures include the changing global population dynamics and changes in population pyramids, for example the increasing ageing population. 

Time marches on: The demographics of certain countries and regions have been progressively shifting towards an ageing population

So, in China today there are over 29million people over the age of 80, which is 50 per cent of the population of the UK. 

By 2050, the UN forecasts that this will have increased to 120million people over the age of 80, double the population of the UK. 

So, as you can see, we will have to develop new technologies to look after this cohort. Again, by identifying the right kind of companies that can benefit from these paradigm shifts, you can add significant value to your portfolio.

One area to investigate when considering the ageing population theme is therefore healthcare. The Covid-19 pandemic has seen many pharmaceutical companies invest in much needed innovation across the sector. 

There are also a variety of healthcare companies leading the fight against illness or diseases that disproportionately target the elderly. 

Many of these illnesses are chronic, so will require ongoing treatment and thus provide a reliable source of stable revenue. Orthopaedic reconstruction is another area for consideration as an ageing population unfortunately results in an increase in the amount of knee surgery operations taking place.

Investors interested in the ageing population theme would also do well to consider the leisure industry, which although hugely disrupted by the Covid-19 pandemic, is set to bounce back as the world returns to normality. 

As people live longer, they will want to stay healthy and maximise their time so gyms, leisure facilities and travel/holiday companies could offer good exposure to the trend.

Renewable energy

We are all very much aware of climate change with the increases in surface temperatures. 

As we know, this is caused by the increased usage in fossil fuels. NASA has estimated that 16 of the 17 hottest years have occurred between 2000 and 2017. 

So, this is really a key trend that is playing out and if we do not want to cause irreversible damage, we will have to develop new technologies that enable us to power the world in different ways to what we have been doing historically.

Looking for solutions: We are all very much aware of climate change with the increases in surface temperatures

Last year, we witnessed a contraction in the use of fossil fuels as restrictions on people’s movements to curtail the spread of Covid-19 also resulted in less carbon being admitted to our atmosphere. 

Unfortunately, fossil fuel consumption is projected to rise as the world economy begins to recover from the initial impact of the virus, but the long-term trend is towards cleaner, greener energy.

The percentage share that renewable energy contributes to the world energy mix has been growing over time, although slower than many would argue is necessary in order to reverse the damage being inflicted on our planet. 

The move to a low carbon economy is a trend that should accelerate, however, as the urgency to create more renewable energy through investment is realised. When all sources of renewables are included, such as biomass and hydro, the forecast is for around 80 per cent to come from renewables in the UK by 2040. 

This pattern is expected to be replicated worldwide. Perhaps the easiest way to get access to renewable energy is through investment trusts. These are physical assets, with secure long-term income streams that require relatively little hands-on day-to-day management.

Investors considering the green theme only need to look at the rise and rise of Tesla to realise the potential in the market, albeit with some caution. As the old adage goes ‘during a gold rush, sell shovels’.

The shovels in this case are the batteries. It’s the use of batteries rather than hydrocarbons that makes Tesla stand out from the competition and it’s unlikely other automotive companies will simply sit back and give Tesla a free ride on the clean energy revolution.

As the UK government has announced a ban on new petrol and diesel cars by 2030, we are the on cusp of a major shakeup in both the automotive industry and how we consume energy.

Space

For centuries human beings have looked up at the magic of the night sky dreaming of the endless possibilities that space has to offer. Today, some of those ideas which could have only been portrayed in the plot of a science fiction movie are on the cusp of becoming a reality for the foresighted investor.

Space tourism may be the perfect example of exactly that. The idea of being launched into space would strike fear into the hearts of many, but the space tourism industry has already raised some serious cash. 

Companies such as The Orbital Assembly Corporation are now raising money to build space hotels and publicly listed Virgin Galactic now has a market cap of $5.5billion (as of 28 April 2021), with it holding a long list of celebrity names desperate to head into space. 

It’s not just the rich and famous in mind however, Virgin Galactic wants this to be a mass market product and is exploring opportunities to potentially use the technology to transport people in the same way long haul flights do.

Wonder: For centuries human beings have looked up at the magic of the night sky dreaming of the endless possibilities that space has to offer

It’s not just tourism that makes space a potentially attractive theme for investors though. While it may sound like something straight out of a James Cameron blockbuster, there is research taking place looking at mining asteroids. 

If you consider the amount of rare earth materials we’re going to need this century, whether that’s for electric cars or in our everyday devices, maybe the idea isn’t so crazy. Natural resources on earth are finite after all. Amazon founder Jeff Bezos has even argued for moving industrial production to space.

There is also talk among some of the largest technology companies in the world of moving data servers to space, where temperatures fall far below freezing. 

Facebook has already built data centres north of the Arctic Circle and Microsoft has sunk data centres to the bottom of the ocean in order to keep its giant web servers cool and prolong the lifespan of the electrical components. Watch this space.

Deglobalisation

Globalisation has been one of the driving forces of world growth over the past few decades. It has lifted millions of people across the globe out of poverty. 

It has enabled significant specialisation and scale advantage to be captured and passed on to consumers in the form of lower prices and to shareholders in the form of higher sales and profit margins. But has globalisation peaked?

Even before the outbreak of Covid-19, global trade was under threat in the form of the US trade war with China and associated import and export bans. 

Impetus: Globalisation has been one of the driving forces of world growth over the past few decades

The outbreak of Covid-19 has brutally exposed a number of issues – supply chains concentrated in a single region and an over reliance on being able to source critical goods, including healthcare and food, outside of a country’s domestic market.

As a result, we expect to see governments start to really focus on shifting their supply chains closer to home, with the associated wage differential being addressed through a shift to more automated production. 

The cost associated with shifting manufacturing to more domestic operations will be mitigated in part, by lower transport costs, faster times to market and the ability to offer greater product customisation.

Take a long-term view

As these themes prove, thematic investment isn’t an approach to partake in on a whim. 

Returns in the short-term may be relatively small or even non-existent, so it’s important that investors take a long-term view, as most themes will play out over decades, not years. 

Take space for example, progress between now and the end of 2021 may be relatively minor but over time, there is the potential for vast growth in the industry. We’ve only scratched the surface here as there are numerous other potential themes worth exploring, from cyber-security to plant-based investments. 

Through considered research, long-term planning and consultation with investment professionals, the potential in thematic funding is very real. 

This post first appeared on Dailymail.co.uk