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The power of thematic investing

06 May 2021 Gareth Stokes

Had someone promised you a 70% 12-month US dollar return from a global equity fund at the beginning of 2020 you would probably have dismissed their offer as “too good to be true”. Wind the clocks forward a year and you would have been kicking and screaming over missed opportunities. Sygnia Asset Management’s funds shot the lights out last year, with an 88.3% return from the Fourth Industrial Revolution (4IR) Global Equity Fund and 72.3% return from the FAANG Plus Equity Fund. Of course, asset managers do not make return promises beyond their stated objective of matching one or other benchmark. In this case, investors were just lucky to back funds that were in the sweet spot of emerging investment themes.

Investing for disruptive innovation

“There are a number of themes in play right now that are shaping our future and will shape the future of investing; these themes are underpinned by disruptive innovations that are turning traditional industries into value traps,” said Sygnia CEO, Magda Wierzycka. She was presenting to the 2021 Virtual Meet the Managers event, hosted by The Collaborative Exchange. Today’s investment landscape is dominated by the accelerated adoption of technology and the emergence of the Millennial generation as the dominant consumer group. As inter-generational wealth transfer from Baby Boomers to Millennials gathers pace, market analysts expect the investment focus to shift away from traditional markets. Against this backdrop, thematic investing is taking over from growth, momentum and value investing strategies.

 “The digital revolution requires a new paradigm of thinking about investing,” said Wierzycka, before commenting on various market aberrations that played out over the pandemic year. Asset managers and financial advisers wrestled with price dislocations in oil, the banking sector and bond yields while tried-and-tested hedge fund strategies were scuppered by retail investors. The GameStop / Reddit saga taught hedge fund managers a valuable lesson about the combined power of ordinary consumers and social media. In this scenario, coordinated action by thousands of lay investors resulted in hedge fund managers being squeezed out of their short positions on certain carefully-selected shares, at significant cost. The lesson: there are risks in the market that did not exist before. 

A four pillar investment paradigm

Sygnia Asset Manager invests based on a four pillar investment paradigm consisting of low management fees via passive investments; risk management through tactical asset allocation; incorporating uncorrelated market return through alternative investment strategies; and thematic investing based on platform-style investing. Thematic investing, which featured prominently during the 2021 Virtual Meet the Managers event, is an investment approach which focuses on predicting long term trends and investing in companies most likely to benefit. 

“We are talking about trends which lead to once-off shifts that change the way we live and the way we work; thematic investing is about investing in innovation and disruptive technologies,” said Wierzycka. Returns from thematic investing can be volatile and the strategy requires investors to commit to the process for at least five years. Launched in 2016, the 4IR Global Equity Fund was one of the first SA-managed collective investment schemes designed around the thematic investing methodology. It made early investments into dozens of global companies with exposure to the technologies underpinning 4IR. Wierzycka said that the fund was not heavily exposed to big technology firms; but rather invested in a basket of around 380 listed companies that were closely aligned to the 4IR theme. These firms, many of which were added to the portfolio during their research and development stages, are now generating revenues and contributing to market-beating portfolio returns. 

The impact of innovation, digital disruption and the emerging 4IR theme is already evidence in global equity markets. By way of example, consider the top six firms by marketing capitalisation in 2005 compared to today. Back then, the list was dominated by oil, financial services and manufacturing operations such as BP, Citibank, Exon Mobil, General Electric and Royal Dutch Shell. Microsoft stood out as the lone technology share. Today the top five positions are held by Apple, Alphabet, Amazon, Facebook and Microsoft, alongside the diversified investment holding company, Berkshire Hathaway. “The weighting of technology shares in the S&P 500 has doubled since 2016 with sectors like materials, real estate and utilities now having little influence on the composition of the broad US markets,” explained Wierzycka. 

Leveraging the digital innovation theme

US-based Ark Asset Management has identified five distinct sector groupings that will enable investors to leverage the overarching digital innovation theme. These include autonomous tech and robotics; genomics; fintech; cryptocurrency; and the Internet of Things (IoT). “The entire market has drifted towards companies that are involved in innovation and places a premium on companies that are involved in disruptive innovation,” said Wierzycka, commenting on the staggering 20% annual return on the S&P 500 index last year. Sygnia’s 4IR Global Equity Fund has exceeded this return, with an average 30.3% per annum since inception. The FAANG Plus Equity Fund did even better, with an average 32.1% per annum since inception. 

These results strongly support that thematic investing is the future of equity fund performance. “The themes introduced today are playing themselves out on the global stage; the challenge facing South African financial advisers, retail investors and institutional investors, is to take a much closer look at what thematic investing is and to understand why thematic investing is the future,” concluded Wierzycka. “The way of thinking about investments premised on balance sheets, income statements and old style sectors is outdated in an age where platform technologies are taking over the world”. The fund manager hopes to keep its investors ahead of the curve with new collective investment schemes with exposure to the autonomous tech and biotech subthemes. 

Writer’s thoughts:
Hindsight is great when assessing one’s entry into, and exit from, investments. One of the challenges facing financial advice professionals is that this big picture thinking is often left to their product provider partners, whether that be an asset manager or insurer. To what extent does your practice independently consider themes and trends before advising clients on their discretionary investments? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts mailto:[email protected].

Comments

Added by Derek Smorenburg, 06 May 2021
Representating many IFAs as members of SAIFAA, I see so many different Investment Strategies being used to meet the needs of Clients plus Families who are each unique in their long term Investment requirements divided into each of their positions within the Accomulation or Decumulation Phases of their Journeys of Life!
After 5.5 Decades, I feel for the difficult choice and direction of all IFAs in the sometimes scary world that they have to master!
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