In the ninth episode of the Thematic Outlook Podcast Series, Bill Bird, Head of Thematic Content, hosts a thematic investor roundtable with industry thought-leaders Elliott Miskin, Director of Thematic Investment at Fidelity International, and Richard Speetjens, CFA, Managing Director and Head of Trends Investing at Robeco. They discuss approaches to thematic investing, specific investable structural megatrends, how strategy is adapting to the current macro context, risk management, and how ESG factors are incorporated into the investment process.
Press play to listen to the podcast.
… but I do think it’s interesting how some of the most pressing current issues also highlight the biggest long term theme.
Welcome to this month’s Thematic Outlook podcast, part of Cowen Insights podcast. My name is Bill Bird, Cowen Head of Thematic Content, and today we have a special episode focused on thematic investing. This episode follows the recent release of Cowen’s Themes 2023 Handbook.
Today we’re joined by two notable thought leaders in the realm of thematic investing, Elliot Miskin, Director of Thematic Investment at Fidelity International, which invests in multiple structural themes including disruptive technologies, demographics, and sustainability. And Richard Speetjens, Managing Director and Head of Trends Investing at Robeco, where he manages Robeco global consumer trends equities and equity funds that invest in future themes and trends in the consumer sector and adjacent areas.
Elliot and Richard, we’re honored to have you on the show this month. Thanks so much for joining us.
Today, we have a great topic, so let’s dive right in. Let’s start at a high level. Thematic investing can mean different things to different people. Can you each tell us a little bit about what thematic investment means to you and your specific approach to it?
Sure. So, for us, thematic investing is about explicitly capturing long term structural trends in our investment approach. Now, these trends might be technological, economic, social, political, or a combination, and their reach extends beyond the traditional sectoral or geographic boundaries that we often use in investing. So for example, the conversation around electric vehicles, the value chain touches upon multiple different sectors and geographies.
I think it’s also important to speak about how we do it, because not only do we have different definitions of thematic investing across the industry, but we have different approaches. Fidelity is a bottom up investment house, and so it was important to anchor our approach to company specific investment research. We rely heavily on our global investment research team with over 200 analysts who are on the ground in offices around the world, and we rely on them to identify the most exciting emerging themes at an early stage.
We’re able to connect the dots between a call with an industry expert in Toronto with a company management meeting in Tokyo with a site visit in Australia. We think this kind of bottom up global approach is the best way to understand a new theme.
And then we take a data-driven scientific approach to assessing that theme, and that’s to make sure it’s suitable for an investment strategy. So we’ve got our own proprietary technology that uses natural language processing and granular revenue mapping to build an investment universe. And then we analyze these universes against key criteria including thematic purity, sustainability, investment upside, and universe diversification.
The reason why we do all of this is so that we can provide our clients with the best exposure to the theme. We think clients are increasingly cautious of theme washing, where essentially generalist portfolios are marketed as thematic, but really have minimal exposure to a theme. So we’re really focused on providing our clients with investment portfolios where the securities over the long term are actually going to be driven by that long term trend we’re investing in.
From Robeco’s point of view, I think of course there’s a lot of overlap and similarities. I mean, it’s all about indeed capturing those longer term secular growth trends, which we observe in many different areas of the universe, whether it’s indeed on the consumer space, in the financial space, in the enterprise space, in the healthcare markets. And I think it’s very important for us that we define investible trends. So they also should be investible. There should be a wide enough investible universe available right now. So we don’t want to invest very early stage, but more when the trends have already become, let’s say, more sustainable.
Also, that there’s more a proven business model, that there is a proven trajectory to already, let’s say, profitability or already a profitable investment case to be made on the individual companies and segments.
Within, let’s say, the trends we focus on, we try to identify who are the winners, so who are the companies who again, benefit most. And part of this, as Elliott already mentioned, related to, let’s say, the purity, because the companies with the purest exposure can normally benefit the most from these trends, but also let’s say the type of companies you look for. So if a trend is already more established, it’s already more well known who is going to be the winner in the respective trends, so it’s better to identify those winners. If you’re a bit more earlier stage, then sometimes you have to buy a basket or, for example, let’s say, the picks and shuffles, so the suppliers of some of these trends, because it’s not very well known who is going to be the winner.
I think a good example, for example, was electrical vehicles or other, let’s say, hardware related trends where sometimes the suppliers are a best way to capture the trend early stage, and later on you see who is going to be the winner in EVs, in smartphones, et cetera, et cetera.
Sustainability for sure is important. And Robeco has a long history in sustainability, which we include in all our investment decisions, and certainly also in thematic space. We have a couple of teams which are more sustainability driven. For example, smart mobility, electrification of the grids and things like that, of course, which are driven by sustainable teams. But also, let’s say, within all our other investment teams, we look for, let’s say, ESG integration in our, let’s say, investment decision. But I think we’ll come back on that topic later also in this podcast.
Let’s turn to specifics. Richard, you mentioned a few very specific investible themes you look at. Elliot, can you start us out maybe with some of the more compelling themes that you see right now, and what are some of the big structural changes that you see for 2023 and beyond?
When we think about themes from a long term perspective, obviously we’re thinking far beyond 2023, but I do think it’s interesting how some of the most pressing current issues also highlight the biggest long term themes. So the global energy crisis is of increasing focus, we’re talking about themes such as energy security and topics such as renewable power generation. And it’s interesting how a topic that was mostly discussed as an environmental issue has now been thrust into the spotlight from a social and from a political perspective as well.
Russia’s invasion of the Ukraine is having a terrible effect on the global food supply chain, and that heightens and highlights the broader challenges we face over the coming decade on feeding a growing population in a more sustainable way.
The discussions we’re having in our politics on inflation, on immigration control, these lead us to think about how long term global demographic trends are going to impact the world.
And then, of course, themes like digitalization also remain extremely relevant, particularly with growing conversations around digital privacy and new technologies like quantum computing and more advanced AI methods. So there’s some of the things we’re thinking about over the next year.
Richard, let’s bring you back in. You touched on a couple of themes earlier. What are some other things that you’re looking at?
Indeed, I mean, everything related to electrification, renewable energy, I think these are very relevant trends and we have a long history there. These have been trends which have been ongoing, but certainly now with more government support, I think these are only accelerating as we speak, of course, also driven by, well, the situation we’re seeing in Europe. But of course also you see in the US a lot of governance support for all these kind of initiatives. So I think that’s one which is going to grow in importance, I would say, for, let’s say, trends and teams to be seen.
The technological transformation of industries is one which we have seen, of course, for the last 20 years, and we expect it to continue also in the next decades. I think probably what you see is that some segments of the market are more advanced in, let’s say, the technological transformation. So industry in, for example, the consumer space are certainly more advanced, like eCommerce or the advertising market, which is digitalized.
But there’s still very young industries as well, like the enterprise which is running behind education, healthcare, the FinTech trend, of course, are very [inaudible 00:08:39], let’s say, the trend is only a couple of years really started, so that’s where a lot of growth prospects are to be seen.
And the last one I would say where we’re also increasingly spending and focusing our time on is, let’s say, the whole diversification of the supply chain. So you do see that given the change in political landscape, you see that companies are changing their supply chain or looking to diversify their supply chain. There’s a lot of talk about the China plus one policy, so that companies are not only dependent in terms of China for their supply chain. But also China is, of course, changing themselves, their supply chain, as well, to become less dependent and diversify their risks.
We see companies doing nearshoring. So, for example, the US is using more places like Mexico instead reshoring everything from, let’s say, Asian markets, which also makes the time to delivery for your products easier as well.
These are certainly some of the key trends we’re observing right now. But as said, these are not things which will only work in 2023, because all the trends we are looking at are longer term in nature. So I would say this is one where the ones we’re probably with a little bit more interest in, let’s say, next year, but we’ll hold for the next 5 to 10 years at least.
Let’s zoom out to the market context. This has been a difficult investment climate, to put it lightly. I don’t know about you, but this is my first pandemic. Given the backdrop of what some have termed a poly crisis, including high inflation, rising rates, and slowing economic growth, what if any, adaptations have you made to your strategy?
I think a lot of the issues that you mentioned have indeed created headwinds for thematic strategies, particularly those that have been associated with the growth style of investing. So it’s forced us, and I think the broader industry as well, to really think about our range of thematic strategies and think about their role within broader asset allocation.
We’ve tried to, within the boundaries of the thematic strategy, and whilst maintaining thematic purity. To ensure a level of diversification and a level of style tilts within our thematic funds. So, for example, our sustainable future connectivity strategy balances exposure to the fast growth technology companies with some more defensive names like telcos that provide the network that enables this connectivity.
And then in terms of asset allocation, I don’t think thematic investing is only about growth as a factor [inaudible 00:11:10]. I think some themes, such as our transition materials or our sustainable nutrition strategies, are actually naturally aligned to more value or defensive factors.
I would say added to that, I mean, also here we have, of course seen how, let’s say, the trends itself are not, I would say, aren’t really affected by, let’s say, the landscape in terms of the growth prospects in some cases. I think where we have made differences for sure is in the areas where you sought a lot of capital going into this market, because capital was widely and freely available, which, of course, led sometimes to very unsustainable competitive environments because money was freely available.
But also investors had a very long term view. I mean, with rising interest rates, of course the investment horizon has shortened. So I think we have focused increasingly within, let’s say, all the team funds on the companies which already have a proven business model right now with a proven free cash flow and profitability profile. And, let’s say, the industries who are, let’s say, on the longer term trajectory towards profitability is certainly more question now, so we have certainly reduced weight within the respective thematic strategies on these names for the time being.
I would say in general, assets, of course, in an environment where inflation will increase, it’s very important to hold a lot of companies which have strong pricing power, because this gives them the ability also to put true cost increases to their customers. So focus on quality franchises, company with proven business models, with proven, let’s say, profitability and free cash flow generation, I think is what’s very important, and those are also the ones who will hold up well in environments where economic growth will slow down.
But of course the price people are willing to pay for longer term high growth names has certainly come down in this new interest rate environment, and that’s what we had to make some adjustments on. But I feel in general, the teams itself have been unaffected, it’s more the price you’re willing to pay for these names is what has changed.
Market corrections can also open up opportunities. What’s rain for the parade is food for the farmer. What kind of opportunities has the recent market reset opened up in your view?
In terms of opportunities, I think we’ve been pleasantly surprised to see how in certain instances our approach to thematic purity has actually driven outperformance. So for example, in our clean energy strategy, by focusing on clean energy producers in the immediate supply chain rather than on broader users of clean energy, we found that we weren’t invested in electric vehicles names, which substantially underperformed.
I think it’s also forced investment managers to think about the longevity of themes, in line with what Richard was saying, and really reevaluate and reassess whether those investment themes are still valid. It makes you ask the difficult questions. I’m pleased to say in almost all cases when we’re looking at the themes that we’ve launched, we’re still happy with the long term trajectory of those themes and of those strategies.
I think what we have seen, and I think that’s the difficulty of, let’s say, investing in these small growthy type of stocks right now, is of course we’ve seen an acceleration in grow during COVID period, which of course led to a massive rerating for these companies. Now, of course, we’re going into a phase where this growth will slow down also because of just tough comparisons, and the market is just in general figuring out what a sustainable growth rate for a lot of these higher growth companies is.
In general, most of the themes, as I mentioned before, haven’t changed also because of COVID. Some trends have even accelerated to during COVID and now slowed down a bit because we are catching up to, let’s say, a more normal environment. But what you see in general is that a lot of, let’s say, companies who benefited from COVID were there only for a short period of time because they just were in the market in the right point of time. So they have been selling off, but they also dragged down a lot of the quality franchises, which we think will easily survive also an environment where we’re in right now.
The opportunities I would say in general are the companies who remain well exposed to these trends, have a longer term strategy, have a proven business model. They’re oversold in some cases as well, because they’re just sold with a lot of the growth and quality names right now. And that, in many cases, if you have a, let’s say, a bit more longer term investment horizon, so let’s say a three to five year horizon, can now provide actually quite interesting entry points.
I would say in general, it’s important to stick to your process, stick to your philosophy, and look what are the trends and the teams you are exposed to are still very valid. Of course, the debate is very much on what is the sustainable growth rates for these trends after COVID in a more normal year, and that’s, of course, very difficult to find out. As we had a tough comparison last year, we’re probably going into a recession year next year, so that’s why the market is looking for a balance on let’s say the sustainability of some of these longer term trends. But I think this certainly leads to a lot of interesting opportunities to buy quality franchises at a reasonable price.
Let’s shift over to risk management and concentration factors. Given that diversification is one of the bedrocks of portfolio construction, what do you do to try to avoid the risk that your portfolio becomes too anchored to one theme?
Sure. So, when we’re assessing themes, one of the things that we are looking for is whether there’s sufficient diversification within an investment universe to support a strategy, or whether all the stocks are very highly correlated, for example. Ultimately, we want our individual thematic strategies to be faithful to one theme, so that they can serve as the best building blocks within a broader asset allocation strategy. But we also run multi-thematic portfolios that invest across multiple themes.
Again, thematic purity is crucial here because what you don’t want is all of the underlying individual strategies owning the same stocks or having the same factor or style exposures, so we continually monitor the commonality between our individual thematic strategies so that we can understand where the overlap is and what style and factor exposures they have, and make sure that there’s significant variety across our range.
Yes, I agree very much. And I would say if we look at, let’s say, most of the strategies we run here at Robeco thematic investing, that most of them have multiple trends within, let’s say, one specific product. So, for example, if I take my global consumer trends, we have a part focus on digital transformation. One is more on the emerging middle classes, one is more on health and wellbeing. And as you can hear, health and wellbeing is probably more a defensive part of the portfolio, whereas of course the digital one is more the higher growth, but also normally higher return part of the portfolio, so in that sense, you try to diversify also within the strategies.
Of course, if you go more to niche strategies where the universe is a bit more restricted, you look to not focus only on companies who are very early stage or very specifically, because then you run too much risk, and try to diversify over companies which are in different part of, let’s say, what we always call the hype cycle, companies which are a bit more early stage, try to diversify also with holdings which are a bit more later stage in the hype cycle, to have different, let’s say, risk exposure, which gives a lot of diversification benefits as well.
Let’s finish on the topic of ESG factors. Tell us how you incorporate ESG factors into your investment process. Let’s start there.
At Fidelity, we incorporate ESG factors all the way through, from the universe definition through the theme assessment and, of course, the management of our portfolios. And when you’re investing in companies on the basis of exposure to long term trends, that focus on sustainability is really heightened because of the investment time horizon. So our analysts evaluate companies separately on the most relevant E, S, and G factors through our ESGV2 rating system.
Also, when considering the long term time horizon, engaging with portfolio companies on key sustainability issues can be important. We like to have an ongoing dialogue with these companies through that time horizon. And ultimately, as the regulatory landscape continues to evolve, we expect the industry to continue to adapt, and of course we ourselves will adapt to that.
Yes, yes, I think very much along the same lines that Robeco has a very long history in sustainability investing, and I think it’s very important that, let’s say, all from the start until the end, ESG is being included in the universe screening, but also in, of course, very much in the fundamental analysis of the individual companies.
We have a questionnaire, which we often use. Our research analysts, who are doing a lot of research on all, let’s say, these ESG kind of topics where we have our own priority data sources, but also external data sources, which we use. And I think a very important one, and certainly as a PM that’s very close to my heart, is becoming more an active shareholder ourselves, so engaging with companies on specific topics.
We always try to pick a couple of specific engagement topics every year where we try to engage with a group of companies on specific topics. This can be about reusable plastics, it can be about cybersecurity, it can be about social risks of gaming. I mean, there many different topics you can think about. So there are, of course, individual engagement cases, but also certainly more broader cases where we engage with a group of companies.
I mean, ESG is not only about, let’s say, looking for opportunities, but I also see it very much as a risk reduction tool. So additional information in your, let’s say, fundamental analysis on ESG topics can lead to red flags, which can lead to extra research you have to do on specific topics. This can be on accounting standard, but can also be on environmental policy or the way they treat their employees.
We are certainly adding resources on that field as well to have and try to have an edge as well to see whether we can get additional research on top of the fundamental research we do as investment specialists.
How do you think about the material ESG factors that drive long term value, and how do you see your approach evolving to ESG investing?
Well, if I see at Robeco, I mean, the way it started, it was very much by, let’s say, we started with the questionnaires which we sent to companies, and the ESG information you have on companies, that’s the way it has started. And then we had of course our, let’s say, initially our more sustainably focused products. I think in the last 5 to 10 years, this has certainly become really mainstream in our firm, and we use it now across all of our strategies.
ESG is not only about exclusions, but it’s very much about, let’s say, including ESG in your investment process and indeed engaging with the companies and try to set up the dialogue. I think that’s certainly what has been the main evolvements. It’s not only about exclusion and doing some reasons and sending some questionnaires, but becoming more involved in, let’s say, engaging with the companies.
As Elliott said, I mean the, of course, regulatory environment is changing quite quickly. I think it’s also sometimes a risk that it really standardizes the whole ESG practice for the whole industry, which makes it also difficult sometimes to differentiate as an asset manager versus your peers. But I think it’s a good way, at least that the regulatory environment forces us to all take these extra information sources into consideration while making your investment analysis. But sometimes it’s also more difficult to differentiate and really say what’s your edge, because it standardizes also the ESG integration for a lot of players in the industry.
The advances in the industry over the last few years in particular have been incredibly rapid, and I completely agree with what Richard was saying over the significant preference for engagement over exclusion.
At Fidelity, we’ve moved from V1 of our ESG rating system, where we had a single rating for a stock, to a V2, where we have different metrics on the E, S, and G side, and more advanced materiality mapping as well. So it’s becoming a lot more granular, understanding that stocks that may look good from an E perspective may not look good from an S perspective.
On the thematic side, sustainability is becoming even more deeply ingrained into not just how we manage our thematic strategies, but which themes we choose. For example, we’ve launched recently our sustainable biodiversity strategy and integrating sustainability concerns within that strategy also interacts with thematic purity, so how do we define thematic purity when it comes to a biodiversity fund and having to come up with innovative approaches there as well.
As we wrap up today’s podcast, I want to thank Richard and Elliott for sharing their insights. This was terrific, extremely helpful. And I also want to thank our audience for taking time out to listen. Happy Holidays to everyone, and see you next month.
Get the Full Report
If you’re already a member of our Research portal, log in.Log In
If not, reach out to us directly for more information.