Thematic investing
Robotics and cybersecurity are just two of the themes that could reward farsighted investors
Thematic investing – where you identify long-term trends that you think will shape the future and invest in them – is taking off, as evidenced by a record number of thematic exchange traded funds (ETFs) launched in 2018.
These new funds have experienced strong take-up to date, says ETF provider BetaShares, which predicts the trend will continue this year, echoing rapid growth in both the US and Europe.
“The idea is to invest where the world is going tomorrow, and not where it is today,” says Dev Sinha, co-founder and co-CEO of Macrovue, an online broker aiming to simplify international investing for Australian retail investors and enable them to invest in thematic portfolios.
Thematic investing can pay off for those who back the trends that do soar but can backfire for those who invest in passing fads. Thematic funds have had to fend off accusations of being “gimmicky,” says a November 2018 research paper from Morningstar UK analyst Kenneth Lamont.
“While surveying the ever-expanding menu of increasingly exotic themes, an investor might well ask: ‘Will the thematic ETF I buy today still exist in 10 years?’ ” says Lamont, who looked at fund mortality rates to address this question. He found 35% of all thematic ETFs launched in Europe have already closed and this rises to 80% for all launched before 2012. For context, less than half of all equity ETFs have closed over the same period.
To profit from thematic investing you need to identify long-term structural trends and invest in companies best poised to benefit, says Macrovue’s Sinha. But these are not necessarily the largest and most dominant companies of today, which attract the investment of most index-driven funds and ETFs, he says.
“By investing thematically you’re taking a long-term, patient approach, meaning you’re more likely to realise the value of your investment in the company as opposed to getting caught up in trying to trade around short-term earnings outlooks,” says Sinha.
And because most themes are not restricted by geography or industry, it gives you an intuitive way to easily diversify your portfolio across company size, industry and geography. It also facilitates investors’ engagement with their investments “because they’re around themes like electric vehicles, artificial intelligence, water scarcity and clean technologies, which
are tangible and can resonate with people’s beliefs and ideas,” says Sinha.
Variety of risks
Because thematic investments ultimately translate to shares, they’re subject to normal equity market risks and volatility. If international shares are included, there’s also currency risk. There’s the possibility that a theme doesn’t materialise to the extent predicted. And because of its longterm nature, thematic investing doesn’t suit those with a short-term view, says Sinha.
“These products are quite tricky to evaluate,” says Morningstar’s Lamont. They often have little or no performance history, and the theme is yet to play out. “History suggests that even if we select a winning theme, we will be lucky if our chosen ETF survives long enough to profit.”
How to access them
Investors prepared to embrace offshore investing have many more choices in pursuing themed investments. In Australia, themed ETFs are increasing but there are few truly thematic managed funds. There are some individual stocks.
In a unique offering, Macrovue has built 22 “Vues” around themes that reflect long-term structural trends, issues or investment styles such as artificial intelligence, clean technology and the aging population. Unlike most ETFs, Vues are concentrated share portfolios of 10 international stocks aiming to outperform industry benchmarks and indexes. Individual investors are the beneficial owners of the shares in their chosen Vue and they can trade the stocks individually. Trades are $15 for up to $12,500 or 0.12% if above. For Vues there is a research cost of 0.80% a year across all portfolios, including international stocks, and a 0.50% forex spread. You can also build your own themed Vue, as Macrovue offers access to over 20,000 shares and ETFs across 23 global exchanges.
Top themes
BetaShares has nominated three themes it thinks will grow in popularity and for which it provides ETFs available on the ASX.
1Global robotics and artificial intelligence
Artificial intelligence is the development of computer systems able to perform tasks normally requiring human intelligence, such as visual perception, speech recognition, decision making and language translation.
“Artificial intelligence is a complete game changer. It's very deep reaching and I think is even more significant than the mobile phone network," says Platinum Asset Management co-founder Kerr Neilson in a recent article in Morningstar’s Your Money Weekly newsletter.
Recent performance of ETFs in this space has been far from spectacular but some individual stocks have soared. Appen (ASX: APX), which provides language technology data and services in more than 150 languages and dialects to technology companies and government agencies globally, is one of the hottest stocks on the ASX. Its share price has jumped from an issue price of 50 cents in January 2015 to around $16.28 at the time of writing. Appen’s share price gained 53% in 2018, landing it sixth for performance among the top 200 companies.
WiseTech Global (WTC), a provider of software solutions to the logistics industry globally, has seen its share price rise from $3.35 at listing in April 2016 to $20.67 at the time of writing.
BetaShares Global Robotics and Artificial Intelligence ETF (RBTZ), launched in September last year, has produced a negative 21.15% return since inception. The index it tracks, Indxx Global Robotics & Artificial Intelligence Thematic, returned a negative 21.32% in the same period.
The Robo Global and Automation ETF (ROBO) gives investors access to the high growth and rapidly evolving megatrend of robotics and artificial intelligence (RAAI) technologies.
Established in September 2017, the ETF returned a negative 12.45% in the year to September 2018. The index it tracks, ROBO Global Robotics and Automation, returned a negative 11.42% over the same period but over the three years to December 2018 it returned 12.53%pa.
Macrovue provides two Vues in the space: Disruptive Technologies, which returned 35.8% in the year to February 4, 2019 and requires a minimum investment of $11,291; and Artificial Intelligence, which has returned 4.8% since inception in April 2018. The minimum investment is $11,187.
2Global healthcare
S&P Global 1200 Healthcare Sector Index, which can include large, mid or small cap biotechnology, healthcare, medical equipment and pharmaceuticals companies. The fund returned 14% in the year to December 2018 (benchmark 14.43%) and 12.92% over five years (13.07%). Investors pay a management fee of 0.47%.
The BetaShares Global Healthcare ETF (DRUG) is currency hedged and tracks the Nasdaq Global ex-Australia Healthcare Hedged AUD Index. It returned 3.95% in the year to December 2018 (benchmark 4.32%) and 5.79pa since inception in August 2016 (6.23%). The management fee is 0.57%.
For those investors who prefer to put their money in managed funds, the Platinum International Health Care Fund, which seeks to take advantage of the changes and developments in healthcare and medicine, is open while the CFS Global Health and Biotech Fund is closed. The Platinum fund returned 8.84% in the year to December 2018 and 11.93%pa over five years. The minimum investment is $10,000 and the management fee is 1.35%.
There are also some stocks listed on the ASX linked to global healthcare. CSL, a global biotech giant, has been a standout, delivering average earnings growth of 13.3% a year and an average total shareholder return of 20.1% a year over the past decade.
3 Global cybersecurity
This is a fledgling theme among Australian investments, and investors wanting wide exposure will need to look offshore.
For those who prefer ETFs, the locally listed BetaShares Global Cybersecurity (HACK) tracks the performance of the Nasdaq Consumer Technology Association (CTA) Cybersecurity Index. It has returned 12.87% over the year to December 2018 (benchmark 13.67%) and 12.58% a year since inception in August 2016 (benchmark 13.41%). It holds US companies such as Symantec, CheckPoint and Cisco and the management cost is 0.67%pa.
There is a range of very small businesses involved in different areas of cybersecurity listed on the ASX, such as Senetas, Prophecy International, Covata, Tesserent, Dropsuite and Zyber, says a June 2018 report from BT. “But some of these are not profitable and still in start-up phase, making it difficult to assess their investment potential,” says the report.