The nuanced world of thematic investing creates a number of specific opportunities, risks and threats for investors. Managing the ebbs and flows and accepting that mistakes will be made is critical, those deep in this space agree.
Critical conversations that will help shape the roadmap into next year were explored at the Professional Planner 2023 Researcher Forum, held this month in Sydney. Participants explored thematic investments and determined who will decide what the next big them will be, what will come next and when to know if the sector is nearing the end of a cycle.
The group opened up about the complex world of thematic investing, exploring where new ideas emanate from and how fund managers determine the right time to launch the next thematic product.
The forum heard that thematic investing refers to an evolution of markets and economies that give rise to parts of that being opportune from a business perspective, where super normal profits can be available – if you happen to be in the right place, at the right time.
However, SQM Research head of fixed income and equities Paul Saliba cautioned that the investment fraternity must not get too caught up by a new way of doing something in the world too quickly.
Macquarie Group head of global listed real estate James Maydew agreed, adding one of the trappings of thematic investing is themes that seem strong early on can change incrementally because they often rely on other factors to work.
“If those things aren’t in place, businesses can fail because all parts of the puzzle weren’t in line for that theme to prosper,” Maydew said.
For example, there’s an evolving opportunity in the ageing population to understand how the real estate and infrastructure sectors can effectively service that need.
“In the US, there’s 10,000 people turning 65 every single day, and there’s simply not enough real estate to cater for that need, and so that’s looking like a very healthy theme, but backed by the real estate fundamentals to be enacted to take that theme to something that’s a credible investment,” Maydew said.
However, he admits the economies of scale are simply not there to deliver aged care facilities in the US, making the investment theme unworkable.
Every decade tends to be marked by a particular investing theme, according to InvestSense director Jonathan Tolub. He talked through the rise and fall of peak oil, the rise and fall of Japanese companies, and the dot com bubble.
“But it’s wrong to say that these things weren’t true,” Tolub said.
“They were all true, but they actually turned out to be true from a thematic perspective, it’s just that you had to be really careful about how you play around it from a returns and stock picking perspective.”
Continual analysis
Maydew said thematic investments need to be steeped in analysis and underwriting.
“There needs to be a process of continual checking of that thesis to understand how much you can bake into your underwriting going forward,” Maydew said.
Panel chair, Conexus Financial editor-at-large, Simon Hoyle pointed out that its challenging to differentiate between a genuine theme, compared to a trend, or worse still, a fad.
Maydew agreed, conceding that it’s a difficult game to play. It’s important to test as you go through time and accept that being wrong sometimes is part of the role, he said.
“The themes tend to be long term structural changes in the economy, but in the short term, anything can happen to individual corporations, and you’ve got to be able to change your themes as the world evolves, and you’ve got to change your thinking,” Maydew said.
“If the theme isn’t supported by the economics over the time horizon that you’re setting yourselves, then it’s just a theme and it’s not going to make the impact on your portfolio that you believe it will.”
The best way to recognise that a theme is running out of steam is to look at the price of investing in that space, Saliba added.
Looking forward, Maydew said that key investing themes globally are likely to be assessing demographics to assess real estate themes, healthcare growth and affordable housing into the future.
Saliba revealed that he’s seeing a theme around private debt and credit gathering momentum, adding that crypto funds will also remain attractive.
