In a ‘bigger is better’ world, it is no longer enough for economists and investment managers to talk about trends. Instead, they talk about ‘megatrends’ – massive global changes that transcend physical, geopolitical and cultural boundaries.
In theory, these huge global shifts, such as an ageing population and the changing climate, should provide rich pickings for investors.
After all, if we are all eating less meat, then vegan burger companies should do well, and surely hip replacement businesses should form the bedrock of your portfolio if we are all getting older?
Looking to the future: We do not have a crystal ball, and seismic events, like a global pandemic, can put predictions out of kilter. So where are the next investment opportunities?
But thematic investing, as fund managers tend to refer to the strategy of picking businesses that might ride this wave of global change, is harder than it looks.
We do not have a crystal ball, and seismic events, like a global pandemic, can put predictions out of kilter.
As a result, special thematic funds aimed at catching megatrends, can be a risky buy.
‘It is an exciting area, but investors need to make sure they have their main bases covered first,’ says Laith Khalaf, financial analyst at wealth manager AJ Bell.
‘Thematic funds are specialist and high risk, so should only be used by experienced investors looking to broaden out already well-diversified portfolios.’
If we are investing for the long term, though, it is good to choose our investment funds and stocks with an eye to how the world is changing, whether we invest in specific thematic funds or not.
As we emerge from lockdown into a post-pandemic future, Wealth asked investment experts which thematic trends have been affected by Covid-19 – and where the next investment opportunities might lie.
Increase your profits as robots cut costs
It is hard to ignore the huge advances in technology use that have been made since the beginning of the pandemic.
Walter Price, who manages investment trust Allianz Technology, says that although the use of technology was increasing across all aspects of business prior to Covid-19, ‘the slope of the curve has increased dramatically since’.
While shares in companies such as Facebook and Amazon have soared in value thanks to our increased reliance on them, experts believe that there is value to be found in other areas of the technology sector.
Jason Hollands, a director of wealth manager Tilney, is excited by robotics and automation – developments that have been accelerated by the pandemic.
Robot chores: Following global supply chain disruption during the pandemic, some predict production will move closer to home, and be aided by robotics and advanced machinery
He says that problems with global supply chains during lockdowns mean we will manufacture more at home, using robots rather than manpower.
He explains: ‘The pandemic has revealed the risks of relying heavily on global supply chains, whether that is over securing personal protective equipment supplies, spats over vaccines and other bottlenecks.
‘When combined with a desire to reduce travel to cut carbon emissions, you can expect to see a lot more production that had previously been offshored to low cost producers like China, moving closer to home where robotics and advanced machinery can be used to cut the costs of production.’
AJ Bell’s Khalaf agrees. He says automation is a key trend in technology, suggesting that investors who want exposure to this should look at exchange traded fund iShares Automation and Robotics.
Among its top holdings is US company Teradyne which makes robots. Bhanu Bhaweja, the chief strategist at investment bank UBS is excited by a shift from ‘bricks and mortar to software, ecommerce, the cloud and intellectual economy’.
James Carthew, analyst at investment trust research company QuotedData, says that the boom in cloud computing is allowing smaller software companies to attract customers more cheaply.
He suggests that smaller companies trust Herald, run by veteran fund manager Katie Potts, is a good way for investors to benefit from this trend.
Cash in on the race to net zero carbon
Another obvious megatrend is the move towards net zero carbon, which is already affecting the investment landscape.
‘This megatrend was brewing before Covid,’ says Darius McDermott, managing director of investment fund expert Chelsea Financial Services.
‘People had finally woken up to the fact that we can’t keep on abusing our planet – we knew that $2.4trillion of annual spend would be required to meet global temperature goals.
Green and sustainable technologies are another trend to consider for your portfolio
‘But the solutions have been accelerated by Covid as governments worldwide have committed to rebuilding their economies better and greener.’
McDermott says that one reason to invest sustainably now is that these solutions are being enthusiastically backed globally. ‘We’ve got a rare moment when regulation is backing an investment trend,’ he adds.
Carlos Hardenberg is co-manager of emerging markets investment trust Mobius. He says there is an ‘unprecedented push towards alternative energy sources – from hydrogen fuel cells to wind and solar based solutions with a gradual end to fossil fuel-based energy supply’.
He adds: ‘This will have a wide-ranging impact on the industrial landscape with new technologies supporting this transformation.’
One way to gain access to this climate driven megatrend is through thematic fund Ninety One Global Environment.
McDermott says: ‘It invests only in companies helping to de-carbonise the world economy.’ Top fund holdings include American environmental services company Waste Management and American electric utility company Nextera Energy.
AJ Bell’s Khalaf suggests fund Liontrust Sustainable Future Global Growth, run by Peter Michaelis, as a good pick for those wanting to get exposure to the sustainability theme.
The fund has stakes in Alphabet and Visa – as well as Spanish mobile phone infrastructure specialist Cellnex.
Khalaf adds: ‘There are more specific sustainable themes that investors can target if they wish, but these come with higher investment risk because they tend to be focused on only one part of the overall environmental theme.’
For instance, Greencoat UK Wind is an investment trust that invests in wind farms across the UK.
Investors picking such specialist investments should make sure they represent only a small part of an otherwise diversified portfolio.
The rewards of an ageing population
Even as the pandemic recedes, health anxiety will undoubtedly linger, as well as the need for investment in national health systems.
Of course, the rapidly ageing global population requires more healthcare, and since older people hold a large part of the world’s wealth, they will be willing to pay for solutions.
Polar Capital’s James Douglas says healthcare providers across the globe will invest in analytics and technologies to drive cost efficiencies
‘Healthcare was already an area in need of investment pre-pandemic and the spotlight shone on it last year has made it even more so,’ says Chelsea’s McDermott. ‘In developed economies, ageing populations mean governments need to be able to treat more people for less money.’
James Douglas, fund manager of investment trust Polar Capital Global Healthcare, believes there will be substantial growth in areas such as telemedicine and healthcare technology for use in the home – for example, monitoring systems.
He says: ‘The healthcare industry is looking to shift patient volumes to lower-cost and more convenient settings such as the home.
‘In a post-Covid 19 world there is an expectation that healthcare systems globally will invest in analytics and technologies to drive cost efficiencies.
‘That should allow for the greater provision of healthcare services without compromising the quality of care and outcomes.’
Fund picks to take advantage of this thematic trend range from iShares Ageing Population (a fund that invests in a basket of stocks that benefit from an ageing demographic) to Worldwide Healthcare Trust.
Dzmitry Lipski, head of fund research at wealth manager Interactive Investor, is a fan of Worldwide Healthcare, which is managed by healthcare investment specialist OrbiMed Capital.
He says: ‘It has generated a return of 108 per cent over the past five years and has outperformed its peer group.’
Try multi-funds for megatrends
Some investment funds invest in a portfolio of stocks that embrace these megatrends.
They include Montanaro Better World, which invests in companies involved in themes such as healthcare, the green economy and innovative technology.
Also, M&G Global Listed Infrastructure which invests in economic, social and ‘evolving’ infrastructure.
Chelsea’s McDermott says: ‘This means the fund can invest in everything from utilities and toll roads to renewable energy, health, education and civil buildings – as well as mobile phone towers, data centres, payment companies and royalties.’
EVEN PORTFOLIOS CAN GO VEGAN
While the megatrends described above might seem dauntingly huge, some experts urge us to consider incorporating a smaller thematic trend – changing diet – into our investment decision-making.
Keith Bowman, analyst at Interactive Investor, says investment in plant-based food is ‘huge’.
He adds: ‘In November last year, Unilever announced a new annual global sales target of €1billion from plant-based meat and dairy alternatives, within the next five to seven years.
‘Vegan alternatives for some of its brands – including Hellmann’s, Magnum and Wall’s are being eagerly pursued.’
Chelsea Financial’s McDermott says this plant-based trend is here to stay. He says: ‘As the world’s population grows and middle-classes become established across countries, so diets will change. From an environmental point of view we really will not want any more meat eaters so plant-based food will become the norm rather than the exception.’
Investment funds operating in this area include Pictet Nutrition as well as Sarasin Food and Agriculture Opportunities.