Megatrend-based thematic investing can help you look forward, not backward

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“It gives us the confidence that we need to really understand these long-term trends and translate those into value drivers for companies, but also allow us to understand what it means for corporate profitability for the years to come,” said van der Geer. 

Pictet looks at several megatrends to support a theme fund. Its water fund, for instance, is based on what it sees with health, sustainability, and commercialization trends, especially as governments privatize their water utilities to sustain them. Van der Geer said looking at several such trends at once allows Pictet to balance out any “oscillating growth factor” and establish the stability to support an individual theme fund.

Van der Geer said it’s also important to avoid narrowly defined themes in order to decrease the chance of error and ensure a fund’s longevity.

“An investable universe needs to be broad enough to warrant active management,” he said, noting Pictet wants to add value in three ways to ensure the theme lasts. First, the themes must be supported by mega-trends. Second, it wants an investable universe that allows its fund managers to position themselves with the biggest upside. And, finally, it wants those managers to be able to add value to their group of stocks that benefits from a single theme.

Van der Geer also said investors need to use ESG in their thematic investing to be truly long-term focused. Companies with poor ESG aren’t likely to capture the long-term opportunities because they could suffer from consumers pushing back on their brand, social pressure, or governance issues that will reduce investors’ willingness to buy their shares. Using ESG assures Pictet that companies have good governance controls and will do the right thing.