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Thematic investing

advantages of active investment in thematic equities

Buying into the theme

October 2018

Specialist companies usually make for effective innovators and, therefore, attractive investments. That's why they feature prominently in our thematic equity portfolios. 

Not all ugly ducklings turn into swans. In the investment world, it takes a lot of skill and specialist industry knowledge to identify growing, innovative companies that will ultimately thrive. It is worth the effort, however, as investors who take an active stock-picking approach and go off the beaten track can be richly rewarded.

The investment managers of our thematic equity portfolios do just that. Their focus is narrower than that of mainstream equity funds. Deploying industry-specific knowledge accumulated over several years, they seek to unearth investment opportunities among specialist firms that tend to lie outside mainstream stocks markets.

They favour 'pure plays' over more diversified companies. That is a deliberate choice. There is, in fact, a large body of research that suggests specialist companies make for better long-term investments than larger, more diversified firms. 

The problem is that such pure play firms can be hard to find in some industries. For example, autonomous vehicles – a market which is forecast to grow more than 10-fold by 2026 to USD557 billion by 20261 -- tends to be dominated by large component manufacturers with very broad business models.

One exception, which the Pictet-Robotics strategy honed in on, was Mobileye.

The Israel-based firm specialises in autonomous driving technology including machine vision systems which are trained to identify pedestrians, monitor blindspots and decode traffic lights. Mobileye estimates that it has a 70 per cent market share in the driver assistance system sector, with some form of such technology already installed in 27 million cars across the world.

Driving's new era

Advanced driver awareness systems (ADAS)

Takeover premium and bid valuation
Source: Mobileye, Pictet Asset Management

In the financial world, too, computers are taking over what humans once used to do – including paying for stuff. The boom in e-payments, fuelled by consumers switching from cash to cards, attracted our Security strategy to the British payment provider Worldpay. The company – which was recently taken over by bigger US rival Vantiv – now processes over 40 billion of transactions a year across 146 countries, up from 11.5 billion payments just three years ago.

In healthcare, meanwhile, specialism is less of an problem but success can be hard to find at the right price. Drugs take a long time to develop, and results are not assured until the end. One company where our Health strategy saw the potential for success was Kite Pharma. The California-based company is a leading player in an emerging type of cancer immunotherapy, known as CAR-T, which uses the body’s own immune system to recognise and attack malignant cancer cells. The CAR-T therapy market is forecast to grow at a compound annual rate of 46.2 per cent over the next decade as the process develops and incidence of cancer continues to increase.

Specialised doesn’t have to mean very small, either. LinkedIn – whose social network today unites 433 million professionals – was part of our Digital portfolio some time before its acquisition by Microsoft for over USD26 billion two years ago. While most of LinkedIn’s own revenues came from jobseekers and recruiters, Microsoft saw the opportunity to take the business to the next level, potentially using the wealth of data from the social network to better design and target its products.

LinkedIn’s price represented a 50 per cent premium to the company’s pre-offer share level. Indeed, all of the companies mentioned in this piece became acquisition targets at a significant premium – a testament to the strength of our investment approach. 

premium targets

Premium implied by bid valuation, %, over closing share price on day before takeover off made

Passive and active ADAS technology
Source: Thomson Reuters Datastream, Pictet Asset Management, 01.11.2018

Clearly, cutting edge innovation is something that big companies can also do well and the investment managers of our thematic equity portfolios also have some investments in a number of large, well-known firms. But, equally, our approach is more focused on identifying opportunities early on by investing in smaller, specialist firms and to use these investments to improve returns. That is what sets our thematic equity portfolios apart.