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Thematic Investment – Truth And Consequence

Christian Armbruester, 26 November 2018

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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. 

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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?

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