Answering this month’s question, Ravenscroft portfolio manager David Le Cornu explains thematic investing and why we favour this approach.
Thematic investing is an approach whereby investments are centred around a concept or idea, rather than focused on a particular sector or industry. This allows for a broader exposure across multiple sectors and results in a more diverse portfolio.
Ravenscroft looks at the world around us and seeks to identify long-term trends, such as the ageing population in the western world. We then aim to identify investment themes that are clear beneficiaries of these long-term trends, such as the increasing need for healthcare services and pharmaceutical products. This means that rather than taking a passive approach and investing in every company and every economic sector, our active portfolio managers focus their investments upon companies and sectors that relate to our themes. By adopting this approach, we hope to improve our chances of delivering attractive long-term returns for our investors.
Can thematic equity investment add value?
Thematic equity investment appears to have added significant value over the long term, but returns can be volatile, and, as with any type of investing, themes can significantly underperform over short periods of time. This is understandable as over the long term there will be periods of time when themes will fall into or out of favour so they will become expensive or cheap relative to the broad market. However, over the long term the higher-than-average growth underpinning the themes should result in better investment returns than the broad market.
We can see examples of this when reviewing performance of the S&P Healthcare and Technology sectors relative to the performance of FTSE World Index (Global equity markets) over multiple timeframes. If we look at performance from 31st March 2023 going back over periods of three years through to 20 years, both sectors appear to have outperformed global equity markets over any timeframe from three years out to 20 years. However, the distribution of returns has been markedly different, each sector has been volatile at times and has had periods of both significant outperformance and underperformance. This was highlighted during the annus horribilis 2022 when the broad S&P500 index reduced in value -18% in USD. The S&P Healthcare index significantly outperformed the broad market, reducing in value -2%, whilst the S&P Information Technology index collapsed -28%, significantly underperforming.
This suggests that diversification across investment themes that aren’t closely correlated is advisable and may help to smooth investment returns to more palpable levels whilst retaining the potential to add significant value over the long-term.
What themes does Ravenscroft invest in?
There are a few core trends and themes that have always featured in Ravenscroft’s discretionary investment strategies. These include:
- Changing demographics: An ageing population has resulted in an increased need for healthcare services and pharmaceutical products.
- Technological innovation: Accelerating innovation and technological breakthroughs are prompting an increasing technology spend to access new products and services, improve efficiencies and drive down costs.
- Emerging equality: A growing global population combined with the rise of an emerging middle class is increasing and prompting changes in global consumption.
Over time, the trends of population growth and increasing consumption have given rise to several sub themes, such as resource scarcity and basic needs. In recent years, climate change is another theme that has increasingly come into focus. The trend of global warming combined with mankind’s ever-increasing need for more energy has made energy transition a key investment theme.
In general, the higher the equity weighting within the investment strategy the larger the thematic tilt will be and the broader the range of themes that will be embraced. This holds true across our core multi-manager range of Income, Balanced and Growth strategies. Our all-equity strategies only invest in thematic equities but focus on very different themes. Blue Chip equity, for example, is anchored around healthcare, technology and Innovation, and global brands.
Our investment process is dynamic, so every aspect is subject to ongoing discussion, review and challenge. Investment themes will change over time, as will the investments that we choose to get exposure to these themes. However, as our themes are anchored on what we observe as irrefutable long-term trends, they do not tend to change very often.
If you’d like to find out more about investing with Ravenscroft, or if you have any questions you’d like us to answer, please contact us.