Megatrends — powerful, transformative forces that have the capacity to shift paradigms and redefine the world we live in. We’ve seen how companies at the innovation forefront of electricity, automobiles and the Internet have performed tremendously well in the past. How can we invest in the next big thing, and how do fund managers identify and select these companies?
00:00 - Introduction to the panelists and Endowus
03:55 - What is the Endowus Megatrends Portfolio and what are its themes?
06:39 - An introduction to our speaker’s firms
13:20 - What key megatrends should investors gain exposure to?
31:20 - How has interest in thematic investing changed over the years?
40:30 - Would investing in megatrends mean a high risk investment with high returns?
52:00 - What do you consider unique in your strategy & investment process?
01:10:30 - Live Audience Q&A
Excerpts from the webinar
What key megatrends should investors gain exposure to? (13:20)
David: We started this century with 5 billion people on this planet, and this is going to double to 10 billion just by the middle of this century. As the urban population continues to grow, so will the number of buildings. It’s as though we are putting up the equivalent of one New York City, every month for the next 40 years.
We focus on 3 mega themes — Climate, Health and Livelihood, all of which align very closely to that of Endowus’ themes. You can invest in the sub-themes of each of these megatrends, for example, clean energy, sanitation and recycling are all part of the Climate theme. There are also a lot of exciting things happening in the healthcare industry.
We talk a lot about Electric Vehicles (EV), but it’s not just about Tesla. There are many different ways of investing into this trend, and instead of just buying into one of these EV companies, we can actually benefit from owning the semiconductor companies that are benefiting from the demand of these chips in these EVs.
Karen: When you invest in something, you are actually trying to take a view of the future. The most tangible way to take this view is with the megatrends.
We have identified several themes that have exposure to these primary forces and megatrends include — AI & Robotics, Safety, Subscription Economy, Water, and Wellness.
How has interest in thematic investing changed over the years?(31:20)
David: We are investing in long term trends that will work today, and through market cycles. When you think about long term trends, themes do not need to be tactical. They can be structural. These themes can hedge against the biggest long-term personal risks. For example, funds focused on healthcare can hedge against rising medical costs as we age.
We should also take note of these 3 key reminders when it comes to thematic investing. Firstly, satellite exposures do not need to be tactical. They can be long term and structural in nature. You should also demand better long-term, risk-adjusted returns from your thematics. Lastly, thematic strategies can provide a great top-down len, but do not go too narrow, and also, complement them with strong fundamental bottom-up research.
Karen: Absolutely. Thematic investing has gone from a ‘nice to have’ to a ‘must have’ especially in more recent years. Having only a single sector or geographic allocation is making less and less sense today. In the past, if an investor wanted to get some exposure to US markets, the investor buys an ETF only on U.S. equities. Today this makes less sense with globalisation as companies are more and more diversified in terms of their markets and where they sell their products and services.
If you want to get exposure to all the FAANGs of the world, your initial reaction would be to think about buying an ETF with exposure to the IT sector. The truth is, when you look at the classification of companies like Alphabet, Apple, or Netflix, they are all split into different sectors beyond IT, like communication services or consumer discretionary as well. So the way you approach your investing has to change. With thematic investing, you have a better grasp of what you want to invest in.
Would investing in megatrends mean a high risk investment with high returns? (40:30)
David: One thing we need to decouple here. While you might find the trends and companies in these themes exciting, as George Soros once said, if you find investing exciting, you’re doing it wrong. What we want to do is to align as many things as possible as investors in our favour, to make sure that our clients get the best possible experience.
We are able to do that in a growth tilted thematic portfolio. We look for high quality businesses that can reinvest profitably, so that they can compound their returns for long term sustainable growth. So these companies we look out for need to have high profitability today, or at least have the capability to be very profitable. These returns of capital need to eventually be higher than their cost of capital and that it will do so years into the future. This should be the immutable law whether you are investing in exciting themes or not.
For example, everyone likes to invest in healthcare. They think everyone needs healthcare, and it is not really price sensitive. However, despite being both defensive and secular growth oriented, 90% of drugs that go through the FDA process actually fail. Out of the thousands of biotech companies founded, eventually only 5 companies with 4 or more approved drugs in the long term. It is better to own a portfolio of high conviction healthcare companies across a wide spectrum, from health tech, to managed care, biotech, life sciences or DNA research that can beat benchmarks and provide downside protection.
Karen: When you consider investing in thematic strategies, the idea is to extract better returns from them. If you have done the work properly based on these megatrends and aligned your strategies, you would already have defined an investable universe that is supposed to grow at a higher rate than the broader economy, or what we call the thematic alpha.
The idea here is to deliver superior growth, but it doesn’t always come with higher risk and higher volatility. It depends on how you approach your portfolio construction. You can potentially manage some of these risks by diversifying different themes into your portfolio as you add more of them in.
Karen: Clients have gradually shifted to different ways of thematic investing. Firstly, a hybrid version where within the core equity allocation, they were adding themes. Sometimes they can be one or multiple, alongside sector and geographical allocations. Over time, as thematic investing thematic investing has instead become the core equity allocation, and usually that’s done in a multi-theme approach, then followed by more tactical sector or geographical allocations. Gradually, the market has become more accustomed to themes, and put them as part of their portfolios.
David: The themes of Climate, Health and Livelihood, were formed through reviewing the 169 sub themes from the United Nations Sustainable Development Goals. From this, we see that there are many different products and services that directly contribute to these goals. Then, we take a look at the companies with a significant portion of their revenues related to these goals, that helped us to define our investable universe. We then make sure we have a minimum of 20% and maximum of 50% to each of our 3 main mega themes. We run a lot of correlation work to ensure that they are not correlated with one another.
Wei Mei: Overall, the key takeaway for investors today is to note that it is going to be important to have active management when it comes to investing in megatrends. Thematic investing is not just about buzzwords.
Have more questions about how we approach thematic investing and about the Endowus Megatrends Portfolio? See our previous Insights article as we take a deeper dive here