Megatrends unveiled: the power of thematic investing

Investors have access to a wealth of information and strategies that can help them make informed decisions on their investments. One potential strategy is thematic investing, which involves focusing on major social and economic trends, known as megatrends.

According to PwC, megatrends are “macroeconomic and geostrategic forces that are shaping the world. They are factual and often backed by verifiable data. By definition, they are big and include some of society’s biggest challenges—and opportunities.”

Understanding and identifying these megatrends can provide investors with significant insights into the future, allowing them to align their portfolios with long-term growth opportunities. In this article, we explore the concept of megatrends, discuss the fundamentals of thematic investing, and examine how you can incorporate these strategies into your investment portfolio today.

Understanding megatrends

Megatrends are powerful, transformative forces that can change the global economy, society, and environment. These trends have far-reaching impacts across industries and sectors, driving significant changes in how businesses operate and how individuals live their lives. Here we consider six megatrends influencing our lives, and potentially our investments.

Six current megatrends to consider

1. Climate change
   Efforts to reduce greenhouse gas emissions are ongoing, but temperatures and emissions continue to rise. Extreme weather events are becoming more frequent and severe. Within this theme we can see how energy generation is shifting from fossil fuels to renewable sources. This is leading to a proliferation of investment opportunities, including renewable energy, energy efficiency and digitisation.
2. Demographic change
   The population of many developed economies is aging, causing strain on social systems and a shortage of workers in critical areas. In contrast, Africa’s population is projected to nearly double by 2050. This gives it a powerful demographic tailwind. This is a popular theme when discussing healthcare, for example, because as people live longer their need for healthcare increases and evolves, creating more opportunities in the sector.
3. Urbanisation
   Urbanisation is accelerating, particularly in Africa and Asia, leading to the growth of megacities and urban corridors. Cities are increasingly relying on smart technologies to improve efficiency and sustainability. This theme could support infrastructure companies for example.
4. Technology (Digitalisation and AI)
   This is a popular theme and one we see regularly in the headlines with rapid advancements in AI and digitalisation transforming industries, enhancing connectivity, and creating an automated world. Technologies like 6G, quantum computing, and edge computing are on the horizon, promising even greater changes.
5. Fracturing World
   Geopolitical tensions and competition for influence are causing the world to become more fractured, with countries focusing on national resilience and localisation. We see the impact of this when we discuss supply chains moving away from China, for example, as part of on-shoring or near-shoring.
6. Resource scarcity
   The increasing demand for resources is leading to significant environmental changes and challenges in resource allocation. Water scarcity and biodiversity loss are common topics within this area and are becoming more relevant in all investments.

Impact of Megatrends on various industries and sectors

Megatrends can have profound effects on multiple sectors. As mentioned above, energy is a key area of impact. The transition to renewable energy sources and the growth of decentralised energy generation requires a large degree of capital. The VT Gravis Clean Energy Income fund invests in projects that are benefiting from the long-term move to more sustainable energy sources.

Another area is healthcare. The Polar Capital Global Healthcare Trust, considers the healthcare sector to be by far the best play on the theme of shifting demographics: “As humans age, the demand for healthcare increases, accelerating from around 60 years of age. This manifests in different ways and impacts all parts of the healthcare industry. The impact of demographics is broad-based across the sector with pharma, biotech, MedTech and healthcare services all exposed to this trend.”

Urbanisation and demographic shifts drive the need for sustainable and efficient food production methods, such as vertical farming. Urbanisation and changing demographics are a good example of interlinked themes that can influence multiple sectors.

What is Thematic Investing?

Thematic investing is an investment strategy that focuses on long-term trends or themes rather than specific regions or sectors. To understand how thematic investing work, it’s important to grasp the fundamentals of identifying and analysing these megatrends to align investment strategies with long-term growth opportunities effectively.

This approach allows investors to invest in areas that capitalise on structural changes in the economy and society and target areas that are expected to experience significant growth.

Advantages of thematic investing

1. Long-term growth potential: By investing in megatrends, investors can potentially benefit from sustained growth over an extended period.
2. Diversification: Thematic investing offers diversification across different sectors and regions, potentially reducing risk. Effective risk management in thematic investing involves spreading investments to mitigate potential volatility and sector-specific downturns.
3. Alignment with personal values: Investors can embrace sustainable investing by choosing themes that not only resonate with their values but also contribute to a sustainable future, like green technology and ethical practices.
4. Future-proofing: As a thematic investor, you can align your investments with long-term trends, potentially unlocking significant growth opportunities. Investing in forward-looking themes can help investors stay ahead of market shifts and disruptions.

Potential challenges and opportunities

Thematic investing comes with its own set of challenges and opportunities. Being aware of these can help guide your research and provide you with more information when making investment decisions.

Challenges to consider

• Identifying genuine long-term trends. Distinguishing between a lasting trend and a craze is important. You could run the risk of chasing short-term fads, driven by temporary market hype. Identifying and validating a true megatrend requires substantial research and understanding of global dynamics, which can be time-consuming and complex for individual investors. One way to combat this challenge is to opt for an actively managed fund. Experienced fund managers play a crucial role in thematic investing by identifying and capitalising on emerging trends to maximise potential returns.
• Concentration risk. Focusing too heavily on a single theme can lead to overexposure, increasing the risk if that particular theme underperforms. Diversification across multiple themes and within a theme is essential to mitigate this risk. It’s important to note that some themes are interlinked and might be affected by similar factors. For example, technology and AI.
• Timing the market. Timing when to invest in or exit a theme can be challenging. Entering too early might mean a long wait for returns, while entering too late might mean missing out on significant gains. Exiting too early or late can also bring problems.

Opportunities to consider

• Access to innovation. Investing in emerging themes allows investors to get in early on transformative sectors. For instance, early investments in AI, blockchain technology, or renewable energy can yield substantial returns as these industries grow. Additionally, sectors driven by megatrends often have significant growth potential. As these trends reshape industries and consumer behaviours, companies leading these changes can see accelerated growth and profitability.
• Alignment with global changes. Themes such as climate change and sustainability are gaining traction as the world focuses on reducing carbon footprints and adopting greener practices. Investing in these themes aligns with global efforts towards a more sustainable future. Rapid technological progress, particularly in AI and digitalisation, offers vast investment opportunities. As these technologies become integral to various industries, they can drive innovation and efficiency.
• Diversification in a portfolio. Investing across multiple themes can help mitigate risks associated with any single theme. For instance, combining investments in technology, healthcare, and renewable energy can balance the portfolio and provide resilience against sector-specific downturns. This broader exposure can enhance overall portfolio performance and reduce dependency on any single trend.

Four steps to implementing thematic strategies in your portfolio

1. Identify relevant themes. Research and select themes that align with your investment goals and interests.
2. Choose your investments. Whether through a general investment account, ETFs, thematic investment funds, or individual stocks, there are multiple avenues to explore within thematic investing.
3. Diversify. Spread your investments across multiple themes and industries to reduce risk.
4. Monitor and adjust. Regularly review your investments and make adjustments as needed to stay aligned with the evolving landscape.

Examples of thematic investments

One option would be exchange-traded funds, or ETFs. These can offer a low thematic investing cost option to access a specific theme such as renewable energy through funds such as iShares Global Clean Energy ETF. Another option is to invest in individual companies to gain exposure. Those investing in Tesla would gain exposure to electric vehicles while those in Nvidia would have exposure to AI technology.

The final option is exposure to themes via investment funds and trusts that use these mega trends and more to within their investment process and philosophy of building a portfolio. There are a range of funds from global, generalist approaches to more specific, specialist funds.

The Martin Currie Global Portfolio Trust is a good example of global trust using long-term themes to build a portfolio. This is a high conviction, unconstrained portfolio of 25-40 companies across the globe, with a focus on quality growth businesses. Manager Zed Osmani targets companies he believes are leaders and innovators across long-term investment themes such as the future of technology, resource scarcity and demographic changes.

For investors looking for a more sustainable approach to thematic investing, the Liontrust Sustainable Future range uses three megatrends to underly their investments: a cleaner, healthier and safer world. Every investment in the Sustainable Future fund’s range has to meet four set criteria: thematic drivers, sustainable credentials, good fundamentals and attractive valuation.

Another generalist option for exposure to these themes in a portfolio is the BNY Mellon Multi-Asset Balanced fund. Manager Simon Nichols, invests in what he calls “future-facing business models” which have the ability to tap into megatrends in their respective industries. The fund predominantly invests in global equities, but also has an allocation to bonds.

More specialist options could include VT Gravis Clean Energy Income and Polar Capital Healthcare Trust, which we’ve already mentioned, but also Sanlam Global Artificial Intelligence or Schroder Digital Infrastructure.

The Sanlam Global Artificial Intelligence fund does what it says on the tin. The fund looks to invest in companies that will benefit from this growing theme. The fund is unconstrained in that it can invest in businesses of almost any size and in more than just technology stalwarts; around half of the portfolio can be found in the healthcare and consumer-related sectors.

The Schroder Digital Infrastructure fund looks to tap into the growing trend of urbanisation, growing population and technology all in one with the worlds ever-increasing demand for digital infrastructure. The fund’s philosophy is simple. Technological advances are driving massive demand for data and therefore digital infrastructure. Simply put, digital transformation is impacting every industry.

Future outlook for thematic investing

It’s important to remember that thematic investing is continuously evolving, with new themes emerging as technology and society progress. Investors need to stay informed about these changes to capitalise on new opportunities.

Megatrends to watch for

1. Sustainability and climate tech: Innovations in clean energy, carbon capture, and sustainable agriculture.
2. Health and wellness: Growth in biotechnology, telemedicine, and personalised healthcare.
3. Digital transformation: Expansion of AI, cybersecurity, and cloud computing.
4. Geopolitical shifts: Impacts of geopolitical tensions on global supply chains and trade.

Investors should consider future-focused themes to stay ahead of market shifts and disruptions, ensuring their portfolios are aligned with emerging trends and long-term growth opportunities.

In summary, thematic investing offers a powerful way for investors to align their portfolios with long-term megatrends, potentially unlocking significant growth opportunities. By understanding and investing in future trends, you can position your portfolio to benefit from the transformative forces shaping our world.

Exploring thematic investment strategies can be an exciting and rewarding journey. It allows you to invest in the future and potentially make a positive impact on the world. By incorporating thematic investing into your strategy, you can stay ahead of the curve and be part of the global changes that are shaping our world.