Thematic investing and associated approaches such as global sector analysis have proved success stories since the start of the financial crisis. Judging by the latest market trends, however, the style will have to work hard to adapt to “the new normal”.
The argument behind thematic or sector investing has not changed. As major listed equities become increasingly multinational and globalised, it makes more sense to analyse them in terms of the sectors they operate in or pressing investment themes their leaders are playing, rather than in terms of the countries they are listed in.
Unsurprisingly, the home of the approach is Europe’s most internationally neutral country, Switzerland. Sarasin, Pictet and Swiss & Global, all Swiss-based, run funds that either play single global themes such as agriculture or use many of them in a general equity fund.
British managers have supported the concept. After a stint at Orbitex Investments, another Swiss house, Robin Geffen (pictured) set up Neptune to treat sectors along global lines. Jan Luthman at Walker Crips, although he runs UK-only portfolios, was an early thematic advocate, which was prescient given that the FTSE 100 derives more than 60% of its earnings from overseas.
However, although such investors have delivered good returns over the past three years – Newton and Threadneedle offer further examples – a challenge may be arising for the approach.
Analysing trends along multinational lines draws investors naturally to multinational companies, usually large caps. This works well for those, such as Sarasin’s London investment division, Sarasin & Partners, who say the world is heading for a nifty-50 age, where global large caps are better resourced and diversified in the face of the crisis. (article continues below)
But although the themes involved may be pressing concerns worldwide, the greatest beneficiaries may be smaller companies, specialists at exploiting them at the level of a region or sub-sector. In particular, government debt problems differ between countries. Spending on pressing issues such as the environment may become more fragmented or vary between nations, depending on demand and the size of state coffers.
Global thematic or sector houses are taking this into account. Pictet’s thematic funds have long invested in small and mid caps. JPMorgan’s Global Consumer Trends fund invests in a small British nursing home company as part of a theme of developed-world ageing. Neptune has increased its public commitment to mid caps with the launch of its UK Mid-Cap fund.
However, global analysts in Switzerland or London will have to wear out some shoe leather if small and mid caps outperform their cosmopolitan peers.