Thematic Investing
Can thematic investments deliver consistent returns?
FT Investment Management Summit, 17 September 2014
Luca Paolini , Chief Strategist, Pictet Asset Management
Pictet Asset Management | For professional investors only |
Very low returns in traditional asset classes in the years ahead …
Expected annual return over the next 5 years (p.a.)
EM Asia equities
14.0%
EM equities
10.2%
JP equities
6.3%
EM local (GBI)
6.1%
Latam equities
5.2%
EM Corporate
3.9%
EM hard (EMBI)
3.5%
DM equities
2.9%
UK equities
2.7%
US equities
2.6%
EMU equities
2.5%
Swiss equities
1.3%
Eur Corp.HY
0.8%
10Y US bonds
0.3%
Eur Corp. IG
-0.1%
SBI
-1.0%
JPM EMU
-1.1%
10Y Ger Bunds
5 Y returns in USD, p.a.
-3.0%
Source: Pictet Asset Management, as of June 2014
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… force investors to look for sources of additional return …
ASSET CLASS
INVESTMENT STYLE
EM
Opportunistic
TACTICAL (<6 months)
Market Neutral
Absolute Return
Smart Beta
STRATEGIC
SECULAR (>5 years)
PRODUCTS
EM
Valuation anomalies
EM,
Alternatives
Structural growth
Mega and macro-trends
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Thematic investing
3
… and to overcome the traditional allocation straightjacket
Traditional Investing
Thematic Investing
•
Benchmark driven
•
Non-benchmark view : focus on future winners
•
Market Cap constraints : focus on past winners
•
Exposure to secular pockets of growth
•
Regions easy to invest (e.g. developed)
•
No geographical constraints
•
No market cap constraints
•
No sector constraints : Thematic investing is a crosssector, is looking for thematic purity
•
Broaden diversification
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From Megatrends to Investment Themes
Network Economy
Demographic Development
Sustainability
Knowledge & Production Society
Focus on Health
Biotech
Immaterialization
Polarization
Generics
Globalization
Security
Digital Communication
Water
Democratization
Timber
Premium Brands
Commercialization
Agriculture
Clean Energy
Technology Development
Individualization
Economic Growth
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Acceleration & Complexity
Source: Copenhagen Institute for Futures Studies
5
Premium Brands - From Megatrends to Investment Themes
Polarization
Spending is growing fastest at the two
extremes of the consumer spectrum:
cheap and luxury brands are thriving.
Demographic Development
Rapid growth of the middle class in emerging-market consumers,
keen to adopt western lifestyle standards; consumption also fuelled
by both the growth and the ageing of the world’s population as over
50s will be wealthier and more leisure oriented than ever.
Immaterialization
Globalization
Demand for branded goods has spread far
beyond the developed world: emerging
markets now account for over 40% of
premium brands demand; Chinese
consumers will account for almost half of
global luxury goods spending by 2025.
The evolution from the traditional to
“new luxury”brand, which is more
diversified, creative and aspirational and
targets a broader consumer base.
Premium Brands opportunity
Individualization
Growing sophistication of local consumers and emergence of new
heavy spender segments (empowered women, entrepreneurs,
celebrities).
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Economic Growth
Demand for luxury goods is expected to rise by c6-8% CAGR
2011-2015, boosted by the economic growth across emerging
markets.
Source: Copenhagen Institute for Futures Studies
6
Water - From Megatrends to Investment Themes
Urbanisation
As the world’s population grows, so too will the number of
and size of its urban areas.
Currently, just under half of the world’s population lives in
cities; by 2030, the UN predicts that 53% of us will be living
in cities – that’s close to 4 billion people
Focus on Health
Poor water quality as a result of lack of sanitation
infrastructure and waste water treatment facility is
a major health threat to humans
Sustainability
Of the world’s total water supply, only 3%
is fresh water. And of that 3%, only a
quarter is useable – or unpolluted – water.
The supply could be further reduced by
changes in the world’s climate. Shifts in
rainfall patterns, the steady
disappearance of glaciers and changing
river flows will each have a negative effect
on the availability of fresh water, the UN
says.
Water Opportunity
Commercialization
The process of increasing the efficiency of a sector
by transforming it into a commercial business. For
Water this megatrend is referring to the team up of
private companies and public bodies (called Public
private partnerships) to provide water services to
households and businesses.
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Economic Growth
Demand for water is expected to rise by over 50% as population
growth increases water use among farmers, industry and households.
In the period 2000 to 2050, consumption of water among both
farmers and municipalities is expected to have risen threefold; in
industry water use is set to double. Water availability is a necessary
condition for economic growth.
Source: Copenhagen Institute for Futures Studies
7
Performance of Investment Themes
Performance of MSCI World Versus Pictet Theme Strategies since September 2009 (in USD, gross of fees)
250.00
200.00
150.00
100.00
50.00
0.00
09.2009
09.2010
GMS
Timber
Clean Energy
09.2011
Water
Biotech
09.2012
Generics
Digicom
Premium Brands
09.2013
Security
Agriculture
Index MSCI World
Source: Pictet, as of September 8th, 2014, in USD, gross of fees
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Benefits from including themes in a portfolio
Individual risk / return profiles compared to MSCI World since inceptions
Volatility
Return
Source: Pictet Asset Management, GIPS, MSCI, Bloomberg, as at 31 July 2014
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Investment Themes in a Global Portfolio
Advantages
Thematic overlay
• Simple
(higher active weights in core
• No change in portfolio
portfolio)
construction
Core-satellite approach
(thematic baskets)
• Variable weights – themes
and sub-themes
• Fixed weights
Multi-asset thematics
(equities, fixed income,
alternatives)
Constraints
• Unwanted biases
• Inconsistency of investment horizon
• Longer investment horizon
• Requires thorough knowledge of themes
• Stronger focus
• Requires dedicated teams
• Reduced biases
• Bigger pool of available
securities
• More refined risk/return
profile
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• Complexity
• Requires sophisticated asset allocation
capabilities
10
Check list for theme assessment
Criteria
Definition
Liquidity & Thematic
purity
Pure and liquid portfolio
Feasible investment portfolio with assets > USD bn 1
@ thematic purity > 20% where 50% of the assets
can be liquidated in five trading days @ 20% of
average trading volumes
Diversification
Low overlap with traditional indices
Overlap with MSCI World < 20%
Expected outcome
Robust & attractive risk-return
profile
Expected risk return profile beats MSCI World
(Sharpe ratio)
Theme withstands stress test through different
scenarios
Materiality
Measurable thematic drivers with
material impact on value drivers
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Materially accretive and measureable megatrend
related impact to value drivers (growth, margins,
risk premium)
11
Investment Themes in a Global Portfolio – Passive or Active?
›
Megatrends known but …
›
Megatrends are not per se value-creating (e.g. democratization)
›
Long investment horizon = low turnover = low transaction costs
›
Exposure to themes (“Thematic Purity”) and shifts between sub-themes are key
›
Megatrends often implies disruptive technologies: pick winners and losers (e.g Apple vs. Nokia)
… Active portfolio management is required!
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Evolution of portfolio – Clean Energy
Thematic breakdown by fund
9%
11%
27%
57%
52%
46%
32%
24%
68%
36%
23%
19%
57%
20%
17%
18%
31.12.2007
25%
29%
35%
31.12.2009
31.12.2010
31.12.2011
64%
12%
31.12.2008
Energy Efficiency
LowCarbon (incl. Natural gas)
Renewables
31.12.2012
31.12.2013
Cash
Source: Pictet Asset Management
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Conclusions
› Intersection of megatrends define thematic investment strategies
› Exposure to a scarce resource: secular growth
› Thematic investing improves risk/return profile
› Core-satellite approach preferred
› Active management required: shifts between themes and identification of thematic purity
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Biography
Luca Paolini
Chief Strategist
Strategy team
Luca Paolini joined Pictet Asset Management in 2012
as Chief Strategist.
Before joining Pictet, Luca worked as an Equity
Strategist at Credit Suisse Securities, responsible for
asset, regional and sector allocation. From 2005 to
2007, he was Investment Strategist at Union
Investment. Luca started his career in 2001 at Allianz
Dresdner Asset Management as a trainee then
assistant vice president, covering asset allocation and
investment strategy.
Luca holds a Master degree in International
Economics and Management from SDA Bocconi
School of Management in Milan, and a Laurea
Magistrale in Political Sciences from the University of
Bologna.
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For more information,
please contact
Pictet Asset Management
www.pictet.com
www.pictetfunds.com
This marketing material is issued by Pictet Funds (Europe) S.A. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction
where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions.
These documents are available on www.pictetfunds.com or at Pictet Funds (Europe) S.A., 15, avenue J. F. Kennedy L-1855 Luxembourg.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Funds (Europe) S.A. has not taken any steps to ensure that the securities referred
to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be
subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or
to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s
prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to
be a substitute for the fund’s full documentation or any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
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16
APPENDICES
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The Development of Thematic Investing at Pictet Asset Management
2010
Leading thematic investor with over USD 20bn
in assets under management
Pictet-Timber
Investments span across the full timber value chain, a
scarcely researched resource of major relevance for the
world
Pictet-Digital Communication
Interactivity as a key driver in communication, explores
opportunities of the digital world for business and
individuals
Repositioned
Repositioned
Pictet-Water
The first fund to
invest in the value
chain of the
world’s most
critical resource,
Water
Pictet-Biotech
The world’s first
biotech-focused
fund
Pictet-Leisure
PictetTelecom
Pictet-Global Megatrend
Selection
Exposure to all of our thematic
equity strategies
2000
1998
Pictet-Premium
Brands
Focuses on the strong
consumption trend of
luxury and
aspirational goods
and services
2005
2004
Pictet-Generics
A pioneering fund
focusing on lowcost drug makers
2009
Pictet-Env. Megatrend
Selection - Strategic
exposure to Water, Clean
Energy, Timber & Agriculture
Pictet-Agriculture
Focuses on the world’s
food value chain
2008
2007
2006
PictetSecurity
Invests in
companies in the
physical and IT
security
business
(excludes
weapons and
nuclear energy)
Pictet-Clean Energy
Invests in the global
energy transition,
favoring carbon-free or
low-carbon energy
sources and energy
efficiency
1997
1995
Pictet Asset Management | For professional investors only |
Source: Pictet Asset Management, (includes AUM from Japanese utility funds, but excludes thematic mandates)
18
Decision parameter: Risk return profiles
Fund
Start
date
Annualised return
Volatility
rf
Fund
MSCI
Fund
MSCI
Biotech
Nov-95
14.53
6.63
29.42
15.6
Water
Jan-00
9.5
3.7
15.62
Generics
Jun-04
10.69
7.08
Premium Brands
Jun-05
10.36
Security
Jan-06
Clean Energy
Sharpe ratio
Fund
MSCI
3.7
0.49
0.19
16.01
3.1
0.61
0.04
16.77
15.9
2.6
0.63
0.28
6.77
22.18
16.47
2.5
0.46
0.26
8.91
4.54
16.84
17.6
2.1
0.53
0.14
May-07
-0.07
3.34
25.91
18.18
1.9
0
0.08
Digicom
Jun-08
13.51
6.25
18.14
18.78
1.6
0.74
0.25
Timber
Nov-08
14.58
14.42
25.16
16.53
1.5
0.57
0.78
Agriculture
Jun-09
12.7
12.61
17.96
14.53
1.5
0.7
0.77
Source: Pictet, as of September 8th, 2014, in USD
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19
Themes sales exposure
No Geographical constraints
Funds
Europe
North America
Emerging Markets
RoW*
Premium Brands
30%
30%
40%
0%
Security
25%
48%
15%
8%
Digital Communication
15%
60%
20%
5%
Clean energy
14%
52%
34%
0%
Agriculture
17%
43%
30%
10%
Timber
15%
50%
30%
5%
Water
32%
38%
26%
3%
Biotech
24%
65%
8%
3%
Generics
10%
40%
40%
10%
Source: PAM, May 2014, * mainly Japan
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