Since the dawn of financial markets, investors have tried to develop strategies to anticipate the future and boost returns. But with almost every industry now in the throes of disruption unleashed by the digital revolution, deep uncertainties surrounding sustainability and the trauma of the Covid-19 pandemic, what is the most appropriate investment strategy for the 21st century?
Until a few years ago, sector investing seemed to provide an answer. By focusing on sectors within the business landscape rather than individual companies or specific geographies, it was possible to unlock value by targeting the most dynamic areas of the global economy.
Today, the pace of change poses serious challenges to focusing primarily on sectors. One of them, argues Mark Hargraves, Global Head of Framlington Equities at AXA Investment Managers (AXA IM), is that rapidly evolving businesses often outpace the methods used to determine the sector to which a company belongs.
Apple, for example, is still classified as an IT company by the Global Industry Classification Standard (GICS), yet its interests now extend far wider, including music, entertainment and healthcare services.*
“Focusing on sectors can just capture one opportunity, not all of them,” says Hargraves. “A lot of the growth trends are global in nature and you have to have a global outlook to take advantage.”
Investing with a
In today’s evolving economy, AXA IM has identified five themes likely to shape both the pace and type of change over the coming decade.
The first is ‘Ageing & Lifestyle’. The global share of people aged 60 and over will increase 42 per cent between 2018 and 2030 – five times faster than the growth of people under 601. That demographic shift will drive heightened demand for all sorts of services including healthcare, diagnostics and monitoring solutions.
The spread of Covid-19 has accelerated the ‘Connected Consumer’. But while online commerce continues to win market share from traditional retail, only 13 per cent of global retail sales are transacted online2. That low penetration level marks a huge investment opportunity in the coming years as more and more people migrate to spending online.
‘Automation’, the third theme, stands to increase efficiency and productivity in society, upending business models and reorganising labour markets. The global robotics industry is expected to grow at 10-15 per cent a year until at least 20253. Moreover, the interface between robotics, artificial intelligence and 5G is poised to touch everything from digital factories and food processing to logistics and robotic-assisted surgery.
The huge challenges to the world’s natural resources from population growth and urbanisation means ‘CleanTech’ (short for clean technology) will be a key theme of the future as governments and industries focus on making a positive environmental impact. It is estimated that annual investments in renewable energy will need to triple to $800bn by 2050 to fulfil key global decarbonisation and climate goals4. Such figures emphasise the huge growth potential for companies that develop innovative solutions in the transition to sustainability.
The fifth theme is ‘Transitioning Societies’. Over the next decade, an estimated 3bn people – more than one-third of the global population – are expected to move out of poverty and join the ranks of the middle class5. That shift will create huge demand for infrastructure and other services as wealth spreads and consumption patterns change.
The case for thematic
Using longer-term secular themes as the basis for an investment strategy is growing in popularity.
The variety and depth of thematic funds has ballooned in recent years: in 2019 alone, 154 new thematic funds appeared; at the end of that year there were 923 thematic funds in Morningstar's global database.
One of the advantages of thematic investing along the five themes of the evolving economy is that it can factor in environmental, social and governance (ESG) considerations – in line with the changing investment landscape as well as with many firms’ focus on contributing to change.
Not everyone is convinced about thematic investing. In an article published recently on the CFA Institute’s website, Nicolas Rabener, managing director of FactorResearch, argued that many thematic funds fail to break even from a cost perspective. “Thematic investing is like venture capital for asset managers,” he concluded.
For its part, Morningstar wrote early last year that the near-constant offer of new thematic funds – from artificial intelligence to cannabis – often caused more confusion than genuine interest. “This steady supply of niche and often gimmicky funds from asset managers has increased demand for clarity and guidance from investors,” it said.
AXA IM’s Hargraves says that much of the criticism seizes on weaker thematic funds backed by poor management as evidence to draw wider conclusions about the efficacy of thematic investing.
He also points out that many so-called thematic funds lack the type of rigorous research and strong foundations that can allow investors to tap into the most compelling themes driving the evolving economy. “When you have a systematic framework and a robust research process, thematic investing gives you a powerful proposition,” he says. “It is based on a clear, long-term vision, and it’s adapting to where the world is heading.”
Investment involves risks, including the loss of capital. This material does not contain sufficient information to support an investment decision.
To learn more about the Evolving Economy and five strategic themes used to identify companies harnessing multi-decade demographic and technological changes, visit AXA IM.
*All companies or stocks mentioned are for illustrative purposes only and should not be considered as advice or a recommendation for an investment strategy.
This promotional document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
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- United Nations, Department of Economics and Social Affairs, Population Division, as of October 2018
- Connected Consumer: AXA IM, Bank of America Merrill Lynch – Higher Online Penetration Primer, Euromonitor, as of October 2020
- Automation: International Federation of Robotics, as of September 2020
- Clean Tech: International Renewable Energy Agency, November 2020
- OECD, as of December 2018