What makes our thematic investment approach different is its combination of three key investment principles:
1. our emphasis on secular growth;
2. our focus and specialisation;
3. and our ability to manage portfolios in an unconstrained manner.
Fig 1: our thematic DNA
Source: Pictet Asset Management
1. Secular growth prospects
Thematic equity strategies aim to capitalise on megatrends, the profound changes in technology, the environment and society that are upending the world and will shape it for decades to come.
Examples include the digitisation of the economy, the rapid expansion of cities and the depletion of the Earth’s natural resources
At Pictet Asset Management, we believe these structural trends are a crucial source of long-run investment returns. That's why we use them as the basis for each of our thematic equity portfolios.
Megatrends matter to investors because they don't only disrupt industries, they also give rise to clear and predictable sources of value and profit growth.
The changes underway in the water sector testify to this.
Fig 2: The Weight of water
As the diagram below shows the water theme is underpinned by 5 megatrends
Source: Pictet Asset Management
As Fig. 3 shows, the water sector is moving rapidly away from a public sector management model to one with ever greater private participation. This megatrend , which we describe as 'commercialisation' - is not just a US phenomenon; it's unfolding worldwide.
Being able to assess the long-term commercial effects of this megatrend was key to the development and management of our Pictet Water strategy.
Fig 3: The commercialisation of water
Growth in water public private partnership (PPP) across all regions
Source: Envisager 2015
Secular growth makes it easier to predict growth and margins
The structural forces that underpin the thematic companies in which we invest make it easier to understand how they're likely to perform compared to the wider global equity universe.
The green dots in Fig. 4 show the sales growth of companies within our thematic universes to that of firms represented in the MSCI AC World Index over five, 10, 15 and 20 year periods. Companies in our thematic universes have experienced higher and more reliable (ie. less volatile) long-term sales growth than the market in general.
Paradoxically, and fortunately for us and our clients, the best thematic companies, those we target, often trade at a discount to their long-term potential. Indeed, we see evidence that the often short-term mindset of the wider market overestimates the rate at which the cash flows generated by thematic companies 'fade'.
Fig 4: Thematics over the long term
Source: Pictet Asset Management analysis based on backtest of our Global Megatrend Selection portfolio. Data to 31.12.2017.
2. Focus
Successful thematic investment demands several different levels of focus and specialisation.
To begin with, focus means being specialists in the themes and industries in which we invest. Being able to understand the evolution of the megatrends influencing the companies operating within a particular industry demands concentrated effort and years of experience. Which is why we are not generalists covering multiple sectors or themes. Some of us have been following certain stocks in our universe for over two decades. We know the management teams inside-out and have good access to them given the size of our holdings.
Second, the companies we build stakes in also have to be very focused - specialists in their chosen fields –which we measure using a proprietary gauge called "thematic purity”. Only companies whose activities predominantly lie within the scope of a particular theme/industry become candidates for investment: pure plays are always favoured over more diversified companies.
Portfolios made up of pure plays can be expected to do better than a portfolio that contains conglomerates.
In part, that's because a large body of research suggests specialist companies make for better long-term investments than larger, more diversified firms. This academic literature, which appears to have been overlooked in recent years, points to the existence of a “conglomerate discount” – i.e. that big firms are worth less than the sum of their parts.1
By extension, portfolios made up of pure-plays – firms that specialise in activities in which they have a distinctive competitive edge – can be expected to do better over time than a portfolio that contains conglomerates. And although mega cap companies are no longer called conglomerates, a large number of such firms pursue the same wide range of activities. Unsurprisingly our strategies are tilted towards smaller- and mid-cap companies. We believe therefore that our focus on purity is a tailwind for our equity strategies.
Focused investment teams with combined portfolio manager and analyst functions
Thirdly, our focus extends to how our investment teams are structured. Each team member is not only a portfolio manager, sharing responsibility for the management of the strategy, but is also a stock analyst. By dedicating all their attention to a clearly-defined universe of stocks, our investment managers develop distinctive, specialist expertise.
We believe this gives them an advantage over the typical active global equity team, which works rather differently. Most mainstream global equity funds are run by managers supported by several analysts, whose task it is to generate lists of their best ideas within their assigned sectors. The portfolio construction team then chooses stocks from among those recommendations.
A typical global equity manager tends to have to cover a very large universe of stocks and are thus less focused than analysts. This can make it very difficult for them to add value in the portfolio construction process, as successfully picking stocks from a list of analyst recommendations is difficult.
3. Unconstrained, forward looking portfolios
The third component of our investment DNA can be defined simply as taking an unconstrained or benchmark-agnostic approach. We devote ourselves to finding the best companies within our investment universes on a bottom-up basis. As long as companies meet our minimum liquidity requirements, we're not concerned which indices they sit in. We want a portfolio of companies that will do well in the future, whatever club they belong to.
For example, as Fig. 5 shows, our Pictet Global Thematic Opportunities strategy has a greater allocation to small- and mid-cap stocks than either the MSCI World or MSCI AC World indices. This is purely a residual of our stock selection - our focus on firms that are specialists in their fields.
Fig 5: Dare to be different
Pictet Global Thematic Opportunities portfolio market cap breakdown vs global equity indices
Source: Pictet Asset Management, 30.09.2018
Low overlap with global equity indices
Further evidence of our unconstrained approach is in Fig. 6, which shows the active share and overlap with the MSCI World of all of our main thematic equity strategies.
Fig 6: Dare to be different - Part 2
Overlap and active share of Pictet thematic equity strategies versus MSCI World
Source: Pictet Asset Management, MSCI, Bloomberg, 31.08.2018. Overlap = sum of all overlapping fund holdings with index, adding up the min of the two weights
Written in our genes
That, then, is the 'DNA' of our thematic strategies: investment themes based on secular sources of growth; an investment approach centred on focus and thematic purity; and portfolios that are unconstrained and forward-looking.
Of course a thematic approach is not for every investor. It won't suit anyone with a shorter investment horizon. Nor for those investors who find it difficult to tolerate significant bouts of portfolio volatility as there are inevitably periods when thematic equities lag equity indices.
But for investors willing and able to escape the herd and take a longer-term view, we think a thematic approach offers highly attractive prospects.
Hans Peter Portner, Head of Thematic EquitiesNovember 2018
About
Gertjan van der Geer
About
Gertjan van der Geer
Gertjan van der Geer joined Pictet Asset Management in 2008 and is a Senior Investment Manager in the Thematic Equities team. Before joining Pictet, he worked for two years at Robeco in Rotterdam as a senior portfolio manager for the Food & Agriculture Fund. Gertjan began his career in 2000 at Fortis MeesPierson as an asset manager in the Private Banking division.Gertjan graduated with a degree in Business Economics and Financial Economics from the Free University of Amsterdam. He is a certified EFFAS (European Federation of Financial Analysts Societies) financial analyst.
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