Investment Strategies
Thematic Investment – Truth And Consequence
The European family office examines the case for thematic investing, highlighting recent examples.
The following commentary comes from Christian Armbruester,
chief investment officer of the European firm Blu Family
Office, who regularly airs views on topics in these
pages.
Christian considers the topic of “thematic” investing – an
approach which seeks to strip some local or national distortions
from portfolios. The method seems to wax and wane in popularity.
As interest in active investment arguably is due for a revival
after a decade of a rising tide in stocks, there is a case for
looking again at this area.
The editors are pleased to share these insights; we do not
necessarily agree with all opinions from guest writers and
readers who want to reply should email tom.burroughes@wealthbriefing.com
Investing according to a view of the world is something we all
do, even if only subconsciously. Unless we subscribe to a
robo-advisor and have a so-called “passive” (or no) view on the
world, what we think will influence the way we structure our
investment portfolios. And it isn’t even whether we think
equities will outperform bonds, but more to do with our currency
allocation and the way we size positions. We try to put a value
on things, try to assess the risk and be smart about the way we
do things.
Thematic investment goes one step further. It is a way to look at
the bigger picture, literally see the forest for the trees and
then make an investment into this view of the world. The
possibilities in how to structure and execute these trades are
endless. Say, we see a trend in the changing demographics in the
western world (e.g. ageing). Clearly, this would entail that we
should invest in healthcare for the elderly.
We could hence buy shares in companies that provide care homes,
potentially also invest in specific medical services companies,
or the biotech sector that are developing medicine to fight
diseases. There are also many clever ways to structure these
trades. For instance, we could also invest directly into private
companies to target a particular segment of this investment
theme. We could also buy options or buy on margin to give us a
better risk and reward profile. We could even buy bonds or lend
money to others who are investing into this theme.
What could go wrong? Ultimately, you are taking a long-term bet
in a world that is random, which means you are essentially giving
yourself more time for things to go wrong (with your theme). In
our population theme, the biggest risk is probably technology: we
may just find a cure. But also politically, with the rules and
laws that affect the elderly in constant revision, each new
administration and social policy can affect the way companies
make money, particularly in the future. And don’t forget, there
are even bigger things going on. For example, maybe this trend as
an investment theme started 20 years ago and all the prices we
now see in the market are reflecting all future expectations.
Isn’t that financial theory anyway? In other words, we could be
absolutely right about our investment theme, but the party may
already be over, and the real money has already been
made.
I think the lesson here is that the more specific the trade is
structured, the less is the risk of getting it wrong. For
example, if you thought this investment theme should be the basis
upon which to structure your overall portfolio, then you could
suffer heavy losses across all your investments if you get it
wrong. But as a way of expressing a particular view and taking a
specific bet within the portfolio (think 5 per cent not 50 per
cent), then a thematic investment has a warranted place.
For instance, I think it is quite clear that the world is headed
for self-driving cars. Disregarding why I think that and just
taking this theme as a given, then at some point in the future,
our vehicles will magically take us to wherever we want. Equally
magically, the vehicles would then also be able to drive
themselves home and/or wait somewhere else until they are needed
again for our next journey. Parking garages at airports, urban
centres or anywhere we don’t need immediate access to our cars
would become utterly useless. So, if we shorted some companies
that are in the business of parking that could be a clever idea.
But of course, then we have market risk and who knows how long
this will take - so we also need to find something that will
benefit from robot cars. So, let’s buy some car makers, because
after all someone is going to have to build more than a billion
new vehicles.
Spread: Short car parking companies / Long car making companies
Source: Bloomberg
And there you go, here is our view on the world, expressed in a very specific trade which allows us to monitor the performance, and the risk we take on our theme very precisely. It kind of takes the uncertainty out of macroeconomic analysis, because we may not know whether we are right or wrong, but we know exactly how much money it is going to cost us. What’s not to like about that?