Newly introduced Swiss-style thematic investing attracts much attention in the UK.

Swiss & Global Asset Management is bringing its method of thematic investing to the UK. And while this method of investing is more common in Switzerland, it is has caught investors’ attention further afield of late, coinciding with structural shifts in the global economy.

Thematic investing can enhance a portfolio’s return and is backed “by genuine demand and reasoning”, says Dirk Kubisch, product specialist at Swiss & Global  Asset Management - the firm created out of Julius Baer Asset Management last October, which manages the Julius Baer fund range including the JB Natural Resources, Energy Transition, Agriculture, Luxury Brand and Biotech funds.

A growing trend

Thematic funds represent a small, but growing, proportion of invested assets – boosted by the rise of environmental and responsible investing, which feed into certain themes. Assets invested in renewable energy/climate change equity funds were 0.5 per cent of assets invested in all equity funds in 2009 (source: Lipper FMI): a figure which grew steadily year-on-year, bar 2008, from 0.02 per cent in 2002.

“Since many investors still think in regions and invest their money accordingly, themes play more of a satellite role for them, or are an addition to their core regional strategies,” Mr Kubisch told this publication recently in an interview.

Criticisms levelled against thematic investing are that it is a marketing gimmick and prone to volatility, sensitive to industry-specific risk and swings in confidence – as investors move away from niches in times of market stress. However, advocates such as Swiss & Global, Pictet and Newton, which all offer thematic funds, claim that this way of organising an investment portfolio has a valid theoretical basis and can enhance returns.  

Grouping investments

Funds require investments to be grouped by some characteristic. An argument for thematic investing is that it frees up managers to examine growth areas comprehensively across regions and asset classes, which makes sense in a globalised world.   

“Thematic investing enables investors to focus on specific themes that fundamentally offer growth and above-average return potential. Usually these are global themes that are not restrained by regional or country boundaries (themes like energy or life sciences are truly global),” said Mr Kubisch.

One common problem for investors who have previously invested along geographic lines is the disproportionate impact of a handful of firms on national stock exchanges. For example, in the FTSE 100 index of blue-chip shares, the oil giants, Royal-Dutch Shell and BP together account for about 18 per cent of the total index; Nokia, the Finnish mobile telephone company, accounts for about a third of the Helsinki Stock Exchange. At some stages, this share of total market cap has been even larger. Thematic investing is attractive because it gets around this sort of distortion.

It also allows a manager to specialise in an area of expertise, says Mr Kubisch.

“Investing in themes can bundle and use industry-specific know-how and experience in a much more focused way (the portfolio manager doesn't need to cover and be an expert in ten sectors from healthcare to IT). This offers the potential for above-average returns … One true satisfaction and competitive advantage for a thematic portfolio manager is to be a real expert and truly understand the business in which he / she invests,” said Mr Kubisch, citing the example of the manager of the JB Biotech Fund, Dr Nathalie Flury, who has a PhD in biochemistry in addition to 12 years’ investment experience.

Research and risk

Broad trends are easy to identify, unlike the winners and losers they will inevitably create. To this effect the firm uses a combination of research approaches: “We do primary and secondary research, i.e. besides taking into account third-party research from brokers as well as independent research companies, we visit and talk to companies directly. Within the specific industries, we also talk to competitors and suppliers,” said Mr Kubisch.

The extent of top-down/bottom-up research depends on the theme. The research approach to the firm’s luxury brand fund is more bottom-up, as the fund is less led by macro trends – although these brands tend to do better in the economic recovery stage of the cycle, said Mr Kubisch. The other end of the spectrum would be natural resources, which are more cyclical in nature, he added.

It could be argued that some themes carry an extra degree of risk, because new products, some of which are not yet on the market, must be considered.

To lessen this source of risk in the biotech sector Swiss & Global invests approximately 75 per cent of the fund assets in companies which have products on the market. Meanwhile the firm’s JB Energy Transition fund invests down the whole energy value chain, including companies providing energy efficiency infrastructure, electric grid infrastructure and oil and gas services/equipment. This avoids complete dependence on young industries such as wind and solar power (although these are included in the fund, along with biofuel).

Long and short term

The firm aims to keep the portfolio turnovers low, due both to the research-intensive process and the intention of investing in companies positioned to benefit from long-term trends; however this doesn’t mean returns aren’t available in the short term, said Mr Kubisch. Indeed, all the firm’s thematic funds delivered positive returns in 2009, from the JB Biotech fund which delivered 5.1 per cent to the JB Natural Resources fund which delivered 64.1 per cent.

“You watch the companies carefully and if you see a trend not in favour of a company you sell it. And you sometimes tactically reallocate between sectors and this is where the top down approach comes in…of course if fertilizers have a huge run up, you take some money off the table,” said Mr Kubisch.  

With regards to exiting themes, he does not see this happening, as all the trends on which the funds are viable for the foreseeable future: “It’s all long term, not opportunistic investing, and it’s more about what’s going on within a theme as long as the long term trend remains intact.”