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 Pictet Asset Management | For professional investors only | 2 … 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 Pictet Asset Management | For professional investors only | 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 Pictet Asset Management | For professional investors only | 4 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 Pictet Asset Management | For professional investors only | 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). Pictet Asset Management | For professional investors only | 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. Pictet Asset Management | For professional investors only | 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 Pictet Asset Management | For professional investors only | 8 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 Pictet Asset Management | For professional investors only | 9 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 Pictet Asset Management | For professional investors only | • 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 Pictet Asset Management | For professional investors only | 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! Pictet Asset Management | For professional investors only | 12 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 Pictet Asset Management | For professional investors only | 13 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 Pictet Asset Management | For professional investors only | 14 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. Pictet Asset Management | For professional investors only | 15 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. Pictet Asset Management | For professional investors only | 16 APPENDICES Pictet Asset Management | For professional investors only | 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 Pictet Asset Management | For professional investors only | 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 Pictet Asset Management | For professional investors only | 20
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