Since the 1960s, portfolio management has almost exclusively developed around the notion of market indices. Whatever the benchmark chosen, be it a general, geographic, sector or style index, the portfolio manager’s mission is to beat the benchmark. These indices have taken such a prominent place in the industry that for many investors the index is the market, and yet it is only a structurally biased and partial representation of it.
At the same time, a different approach to portfolio management has developed in recent years: thematic investment. Leaving these benchmarks to one side, it aims to identify and encompass themes that will significantly influence the valuation of assets over the long term that will create winners and losers. The beauty of this approach is that it is relatively intuitive, even for non-market specialists. For example, the impact of the ageing world population, which we are going to talk about today, but also that of climate change, the business digitalisation or the scarcity of resources, are all themes that everyone can appreciate will have a decisive impact on the tectonics of financial markets.
The first step in thematic investment is therefore to identify these structural trends and determine their scale, their future impact on the valuation of stocks and their sustainability, in order to avoid simple fads. It will also be about getting the timing right. Some themes can take decades to generate an effect and the key is not being right too soon... or too late. We remember Bill Gates’s enthusiasm for home automation in the late 1980s. It is clear that 30 years later we still open our refrigerator by hand and put the key in the front door lock. This obviously does not mean that these changes will not take place but that their adoption takes longer than expected by their promoters.
In addition, a theme is a living concept and is not set in stone. In particular, it will be necessary to re-evaluate its validity over time and the way in which it may be implemented, in particular with regard to sub-themes which could become obsolete or, on the contrary, come to the fore.
The second step is stock picking. At this stage, it will be a question of identifying the companies which, in addition to their intrinsic value, will be most responsive to changes in the chosen theme. It is probably at this stage that a thematic manager reveals his true talent; the factors influencing the evolution of a stock are multiple by nature (valuation, quality of the management, level of competition, etc.) and should also be taken into account.
Next, the portfolio manager needs to work on the construction of his portfolio and ensure it does sufficiently balance its diversification (at the level of the sub-themes and the single stocks), in order to offer a robust profile without “diluting” the capacity of the stocks from capturing the dynamics of the theme.
Thematic investment therefore seems to be a useful tool in an investor’s global portfolio, to be used alongside benchmarked strategies. Rothschild & Co Asset Management Europe saw this way forward, launching its first thematic fund in 2010 and dedicating a specialised team to it.
In this letter, we go into more detail on our approach to the Silver Economy, which is based on a major and lasting trend, namely that of the ageing global population. We will illustrate the way in which we try to cover this theme, by describing the different sectors that we believe are best able to benefit from it. Finally, we will focus on in vitro diagnostic, which we believe to be one of the most promising innovative industries in this context.
