Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 302

Thematic exposure to global trends using ASX

Good share market returns require identifying companies likely to produce healthy earnings and dividends over time. Investors traditionally have had the choice of active managers attempting to pick winners, or passive managers taking a rules-based approach, such as investing in companies that meet criteria relating to price momentum, valuations or financial metrics, or the overall index.

The problem with many of these approaches is that the choice can be governed by short-run – or cyclical – dynamics. Deciding which part of the cycle we’re in, and which companies will do well in that part of the cycle, is no easy task.

Thematic investing offers an alternative approach, embracing the cost and diversification benefits of passive investing but with a rules-based strategy to identify companies with the potential to benefit from predictable, longer-run structural changes.

What is thematic investing?

The goal of thematic investing is to identify megatrends and enduring structural forces that will affect the economy over time, and then position one’s portfolio to benefit from those forces, irrespective of the ups and downs of current or future economic cycles.

The table below summarises the differences between thematic investing and approaches relying on identifying and positioning for short-run economic cycles.


Thematic or secular investingCyclical investing
Investment FocusMegatrends: disruptive technologies, demographic changesGeographic regions, sectors of the economy, factors such as momentum, value, quality, volatility
Type of change focused onStructuralCyclical
Investment horizonLong termShort-mid term
Timing considerationsEntry and exit timing less importantEntry and exit timing important
Illustrative size of portfolioSmaller universe of securitiesLarger universe of securities


Advantages of thematic investing

A primary benefit of longer-term investment approaches like thematic investing is that the timing of entry and exit points is typically less crucial than with more cyclically-sensitive investment strategies.

As seen in the table below, the rate of adoption of major technology changes over the past century – such as the telephone, electricity, cars and radio – has been measured in decades.  The pace of technological innovation is unrelenting, with more recent changes such as the internet, smart phones and social media just as disruptive, and take-up more rapid.

Adoption of technology in the US (1990 to the present)

Source: Asymco, BlackRock

Other megatrends likely to be sustained over coming decades include:

 

  • global population ageing

 

 

  • climate change and the demand for clean energy

 

 

  • Asia’s rising middle class

 

 

  • adoption of robotics, and

 

 

  • the increasing threat of cybercrime.

 

 

Thematic investing can improve portfolio diversification, as returns are likely to have low correlation to swings in major regional or sector investment benchmarks.

Thematic investing readily lends itself to a globally diversified passive approach – using rules to identify companies with revenue exposure to a secular trend, and then investing in a broad selection of the leading players anywhere in the world.

Of course, active managers are also able to take a thematic approach to investing. However, they are likely to face just as many challenges ‘picking winners’ from secular change as they currently do in picking winners from cyclical change.

One of the benefits of a passive market capitalisation indexing approach is that it tends to increase portfolio weightings to emerging ‘winners’ with rising market cap over time, while cutting exposure to ‘losers’ with declining market cap. In dynamic forward-looking markets of the type that lend themselves to thematic investing, the market, on average, has demonstrated a tendency to get it right over time with prices (or market capitalisation) leading fundamentals such as actual revenues and earnings.

Thematic investing is an approach that resonates with investors, as it taps into economic changes they can see and hear taking place around them every day.  What’s more, many of these megatrends – such as environmental, social, or technology-focused themes – tap into an increasing interest in socially responsible investing.

Megatrend opportunities on the ASX

Thanks to the advent of exchange traded funds (ETFs), it has never been easier for investors to gain diversified, transparent and cost-effective exposure to these major investment themes shaping our world.

 

Don Hoang is an Assistant Portfolio Manager and Ilan Israelstam is Head of Strategy at BetaShares, a sponsor of Cuffelinks. BetaShares offers a wide range of thematic ETFs. This article is for general information purposes only and does not address the needs of any individual.

For more articles and papers from BetaShares, please click here.

 

RELATED ARTICLES

$100 billion! Five reasons investors are flocking to ETFs

Global ETFs: insights into a multi-trillion-dollar industry

Will ETF liquidity be there when I need it?

banner

Most viewed in recent weeks

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Shares

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Retirement

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

Estate planning made simple, Part I

Every year, millions of dollars are spent on legal fees, and thousands of hours are wasted on family disputes - all because of poor estate planning. Here's a guide to a key part of estate planning - making an effective will.

Investment strategies

Markets are about to get a whole lot harder

As the world shifts away from one of artificially suppressed interest rates and cheap manufacturing, investors will need to carefully consider how companies are positioned to navigate the new higher-cost paradigm.

Investment strategies

Why commodities deserve a place in portfolios

2024 looks set to be another year of reflation and geopolitical uncertainty — with the latter significantly raising the tail risk of a return to problematic inflation. That’s a supportive backdrop for commodities.

Property

What’s next for Australian commercial real estate?

It's no secret that Australian commercial property has endured its most challenging period since the GFC. Yet, there are encouraging signs that the worst may be over and industry returns should improve in the medium term.

Shares

Board games: two hidden risks for stock pickers?

Allan Gray's Simon Mawhinney thinks two groups with huge influence over our public companies often fall short of helping shareholders. In this interview, Mawhinney also talks boards, takeovers, and active investing.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.