Deep Dive: Endowus Megatrends Portfolio

What is the Endowus Megatrends Portfolio?

The Endowus Megatrends Portfolio is a 100% equities portfolio aimed at achieving high growth expectations through global themes backed by strong structural trends. Consisting of six best-in-class funds spanning the major themes of Healthcare, Technology, Industrials and more, investors might be most drawn to this portfolio for its attractive potential growth rates, diversification and differentiation factors. It also presents the opportunity to invest in the forces of change — sustainably and meaningfully.

The portfolio consists of funds investing in one or more thematic trends. Megatrends are powerful, driving forces that have the potential to reshape the way we think and live by changing the global economy, businesses and environment. As investors it also creates unique opportunities to buy into long term trends and themes that could generate outsized returns over a long period of time as these trends manifest itself and become the norm in our society and the economy. The companies leading and driving these changes often benefit and generate good long term returns.

The Portfolio has a diverse geographical exposure, with meaningful allocations to Europe and Asia. The majority of its allocation can be found in the US, as the US remains the most important financial market in the world and where new ideas and trends can typically be found. However, the underlying exposures are much more global as many of these US and European companies would have meaningful exposure in their underlying businesses across global markets including Asia and other Emerging markets.

Consistent with the three major themes, the Portfolio has its sector exposure found mainly in the Healthcare, Technology and Industrials sectors. Other notable sectors such as Materials and Consumer are also reflective of the Portfolio’s main thematic focus.

We have selected these six best-in-class funds because of their specific thematic focus and the portfolio managers’ ability to translate the thematic focus into actual, solid investment returns. The Portfolio is built around three core multi-thematic funds, the AB Sustainable Global Thematic Portfolio Fund, Thematics Meta Fund and Allianz Thematica Fund. These three main funds utilise a multi-thematic approach designed to provide investors with a robust exposure to the leading and emerging themes with the highest opportunities to generate sustainable returns. The funds are supplemented with three other single-theme funds that reinforce the Megatrends such as Nutrition, Climate and Healthcare.

Why invest in Megatrends?

The Megatrends theme is an attractive investment opportunity backed by several positive characteristics.

Attractive high growth above trend economic growth

Many emerging themes have potential growth rates that far outstrip that of GDP growth, due to the speed of adoption and the relative size of untapped markets. Popular trends such as digital health data and electric vehicles are projected to grow at an annual rate that is more than five times that of the US GDP, due to the rapid development and adoption of these two segments. These rapid growth rates provide opportunities to select winners that will benefit from the growing adoption and rapid market expansion of their underlying products and services.

Other prevalent themes, such as the need for infrastructure spending and water treatment, are essential and require significant amounts of investments. For example, US President Biden has been proposing a US$1 trillion infrastructure and a separate US$2 trillion welfare and climate change bill.

Diversification and Differentiation

The Megatrends theme consists of a wide variety of globally competitive companies often leaders in their field and this provides for broad diversification opportunities across a few key trends and more than ten other sub-themes. Some key features include;

• More than 500 companies in the portfolio across a multi-manager fund of funds approach.
• Many companies are under-researched or under-represented by global equity indices, thus increasing the possibility of alpha generation.
• “Crowded” companies such as Meta (Facebook), Amazon, Alphabet and Tesla are either not included or have a very small weight. Differentiating and making this a complementary portfolio to the Endowus Technology portfolio.

As can be observed in the table above, none of the Portfolio’s funds have a significant overlap with each other. Importantly, none of the funds have a significant overlap with the general MSCI ACWI, World Info Tech and Healthcare Indices respectively.

A Sustainable Approach

The Sustainable Development Goals (SDGs) are a collection of 17 interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all". The SDGs were set up in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.

Extract from UNPRI: “Investing with SDG outcomes: a five-part framework”

Issues such as human rights abuses, climate change and inequitable social structures seriously threaten the long term performance of economies, investors’ portfolios and the world in which beneficiaries live. Expectations from beneficiaries, clients, governments and regulators over how investors should respond have changed – driven by increased visibility and urgency around many of the SDGs.

The urgency to deliver on the SDGs has only been increased by the COVID-19 pandemic, with several governments recognising that the SDGs can act as a guide to the global response, “to make sure that nobody is left behind”.

With a combined US$89 trillion in assets under management, PRI signatories can play a unique role in helping the world to meet the SDGs – individually, and in collaboration with fellow investors and broader stakeholders. A focus on outcomes allows investors to understand the risks and opportunities that are likely to exist in the transition to an SDG-aligned world. Investors can:

• Identify opportunities in business models, supply chains and products/services;
• Prepare for legal and regulatory developments;
• Protect their reputation and licence-to-operate;
• Meet commitments to clients and beneficiaries – and communicate progress;
• Consider materiality over longer time horizons, to include transition risks, tail risks, financial system risks etc.;
• Minimise the negative outcomes and increase the positive outcomes of investments.

A majority of the portfolio’s underlying strategies are either aligned with sustainable development goals or are heavily influenced by ESG factors. This alignment not only impacts the society positively, but is also self-serving as it represents an attractive source of alpha generation. Just like the Endowus Core ESG portfolios, we believe that exposing the portfolio to key long term themes and trends that align to the long term SDG goals and the ESG sustainable theme is important.

Who should invest in Megatrends?

Investors who are able to take on more risk and bear a higher level of volatility can consider an investment in a Megatrends portfolio. Due to the secular tailwinds supporting these trends, returns are likely to be higher than the typical broad-based equity portfolio but may take longer to exhibit itself in returns. However, as these Megatrends do often catch the general public’s attention, there can be times when the themes or trends are “discovered” and lead to a very fast re-rating of sectors or individual companies. Therefore, there is also the risk that a substantial amount of “hot money” could chase returns and thus drive volatility. It is even more important, as a result, to have professional managers that will be not only opportunistic but disciplined in the investment process.

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One example of such volatility and cycles is the solar sector which was initially hugely popular, with the Mac Global Solar Energy Index rising +555% over the period from 2005 to 2007. However, the sector came crashing down in the following year, with the index declining by -84% as the industry suffered from massive oversupply and low adoption and the equity markets were decimated by the Global Financial Crisis. The crisis did create opportunities for solar, as governments were able to develop the renewable energy sector as part of stimulus packages.  

A second drawdown hit in 2011-2012, as a combination of weak demand and massive oversupply led to a slump in prices and profits for solar panel makers. The solar sector did experience a resurgence post-Covid, as the global focus shifted away from coal and towards renewable energy instead. Also as the industry scaled and costs fell rapidly to make it affordable and profitable to adopt solar.

Why should you invest in Endowus Megatrends Portfolio?

Alpha generation from positioning into key long term themes early

Staying ahead of the curve – As the nature of trends suggest, getting the market timing right for investing in Megatrends is an important factor. As seen in the graph below, technology adoption can be very rapid, with the smartphone industry requiring only a few years before becoming a household essential

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Therefore, it is rather crucial to be able to identify the market opportunity at the right moment:

• Too early – risk of opportunity costs; difficulties in picking the right companies
• Too late – risk of buying at inflated valuations; trend reaching the end of its cycle

Active positioning versus index funds – unlike index funds that simply track the index, Endowus’ selected active managers are able to take an unconstrained approach towards investing. This approach allows them to identify quality companies that may be under-researched or neglected, and in doing so generate Alpha.

Furthermore, these expert professional managers are leading thematic investing houses and are able to dynamically reposition their portfolios based on the prevalent market cycle, and also maintain strong buy and sell discipline when investing. These steps typically allow the portfolio to be more defensive in having lower downside captures and drawdowns.  

Strong risk-adjusted returns

The selection of funds managed by renowned global fund managers in thematic investing such as AllianceBernstein, Allianz, BlackRock, Natixis Thematics and Schroders has allowed Endowus to construct a high quality Portfolio. As a result of the managers’ capabilities, the Portfolio has been able to achieve strong risk-adjusted returns. The Portfolio’s annualized returns since 2017 is significantly higher than the broad MSCI ACWI and MSCI ACWI Healthcare indices while maintaining a similar level of volatility.

Endowus Investment Office’s ongoing assessment

Funds chosen to be part of the portfolio do not necessarily remain in the portfolio forever. Endowus’ Investment Office maintains an ongoing assessment of the portfolio:

• Performance consistency of underlying funds
• Key risks arising from factors such as a switch in portfolio manager
• Research on new funds that can further add value to the portfolio

This assessment helps to ensure that the portfolio continues to be invested in the best-in-class managers and is responsive to ongoing developments/new ideas.

Learn more about how you should approach a Core-Satellite Portfolio investment strategy here.

Appendix: Portfolio Details

Portfolio Allocation and Cost

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