25 Apr 2020
25 Apr 2020
The first challenge any investor faces when building a portfolio is how to make sense of thousands of companies,industries and markets in an ever-changing world. There are several different ways to do so, each with its own benefits.
The traditional ‘top down’ approach groups companies by broad area of operation - Financials or Information Technology,for instance - and analyses how macroeconomic factors such as GDP growth and inflation might drive their performance asa group.
A ‘bottom up’ approach focuses on a company’s fundamentals, such as price-earnings ratios, return on equity, marketshare and sales growth – identifying promising companies within a sector without looking too hard at market conditionsand economic indicators.
And there is growing awareness nowadays of a third approach: one that future-focused retail and institutional investorsare increasingly using to inform their investment strategy. This approach takes another step back, looking first at theglobal ‘megatrends’ that are reshaping the world before our eyes, then analysing how these will affect companies overtime.
This is called thematic investing, and it’s a simple but powerful way to build long-term portfolios that could thrive ina rapidly-changing world.
Thematic investing is a kind of top-down approach which focuses less on traditional economic indicators such asinflation and GDP growth. Instead, it looks at longer-term, structural trends in the world, ones that could driveperformance in ways traditional investors may not yet realise.
These could be geopolitical, such as growing power and wealth in emerging economies, or technological, such as thetransformative impact of disruptive technology and digitalisation, or social, such as the way accelerating urbanisationwill expand the world’s cities many times over in the decades to come. Climate change and resource scarcity is anothersuch ‘megatrend’ which will cascade through the world’s companies over the next few decades – a shift which atraditional shorter-horizon investment approach may not accommodate.
Thematic investing’s global and long-term view is unconstrained by the geographical or sector categories of traditionalinvestment approaches. It aims to identify companies, wherever they are in the world, that may be positioned to benefitfrom emerging themes set to play out over years or even decades – not just the next financial quarter.
This forward-looking investing approach analyses how tectonic shifts will bring some companies great success, and othersexistential struggle. Tomorrow’s leading companies may be unknown today, operating in areas which will come torevolutionise some aspect of daily life, whether that’s AI, carbon-neutral technology, fully autonomous vehicles orsmart homes.
Conversely, today’s winners – the world’s biggest companies, systematically preferred by market-cap-weighted funds – maystruggle in a new millennial-led environment of green energy, digital transformation and disruptive technology
Thematic investing isn’t a new concept. Some active investors have practised this approach for decades, usinghuman-based quality control and dynamic stock selection. This has often been accompanied by higher management fees and alack of transparency.
What’s new about thematic investing in recent years is the democratisation and cost reduction of the strategy – bringingadvanced technologies and low-cost passive investment vehicles into a space that was once the preserve of the activemanager.
Lyxor has partnered with indexing giant and data powerhouse MSCI to create a new set of indices covering some of thebiggest thematic investing trends of our world. These combine active human oversight, passive implementation, and thelatest data science technologies to build portfolios that should thrive in the future – for a fraction of the price ofmost standard active funds.
The five new Thematic ETFs cover what we feel are the most important emerging investment themes of our age: the growthof the Digital Economy and Disruptive Technology, urban change with Future Mobility and Smart Cities, and the buyinghabits of Millennials.
The Digital Economy refers to economic activity resulting from online connections between businesses, devices and people. It includes established areas such as e-commerce, online payments and digital advertising, as well as rapidly developing fields such as cybersecurity, financial technology (fintech) and the sharing economy
Transport revolutions have transformed the world over the past 300 years. The canal network, the creation of the railways, steam-powered ships, the introduction of petrol and diesel internal-combustion engines in cars, and the invention of flight were the biggest breakthroughs. Future Mobility captures the next stages of human transport, which will upend our lives once again
Cities already house half of all people on Earth, and another 2.5 billion people are expected to join them by 20501. Ninety percent of this increase will be in Africa and Asia2. Smart Cities tackle challenges such as urbanisation and climate change with new technologies such as automation, the Internet of Things and smart grids.
New Disruptive Technology will deliver simpler, more accessible, and often more cost-effective solutions to many of the biggest challenges faced by humankind. This is sometimes called “the fourth industrial revolution” – a revolution that will transform how we live and work. Companies embracing disruptive tech have the power to reinvent themselves and create new markets
Millennials – or Generation Y as they are also known – are set to have a huge impact on the global economy. Their spending and saving decisions will mean the demise of some long-established business models and the rise of new ones. Millennials include the 2.4 billion people born in the 1980s and 1990s3. They make up almost one-third of the global population and are already taking over from the baby boomers and Generation X who drove the economy in recent decades.
Each of our Thematic ETFs combines human insight, cutting edge data science and Artificial Intelligence techniques in a unique way to identify the companies that matter most, and ensure your portfolio stays one step ahead. As a pioneering ETF provider with a history of innovation, we’ve gone the extra mile to build some truly state-of-the art funds for a new state of mind.
We’re incredibly excited about this range and hope you can join us in preparing portfolios for change.
1 McKinsey Global Institute, June 2018, Smart Cities: digital solutions for a more livable future
2 United Nations, World Urbanization Prospects 2018. 3C40 Cities, https://www.c40.org/why_cities
3 Bloomberg using United Nations World Population Prospects data, August 2018,https://www.bloomberg.com/news/articles/2018-08-20/gen-z-to-outnumber-millennials-within-a-year-demographic-trend
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