Thematic Investing - Megatrends

Continuing with the subject of investing with very little effort vs stock picking discussed in the threads Father vs Son 2020 and What is your benchmark?, I’ve noticed that thematic funds based on “megatrends” seem to be gaining in popularity. Are these a good long term passive investment strategy or should investors be wary of clever marketing with fund providers spinning a believable narrative in the interests of selling more funds rather than achieving better long term performance (the once popular BRIC themed funds come to mind).

According to BlackRock these are the main megatrends:

Megatrend Example Sectors
Shifting economic power Asia, and specifically China will become the centre of the global economy.
Technological Innovation Digital transformation, cyber security, gaming, online shopping etc
Climate change / sustainable future Renewable energy, electric vehicles, sustainable materials, food and water supplies.
Shifting Demographics Process automation (e.g. robotics), healthcare innovation
Rapid Urbanisation Infrastructure, consumer growth

There’s a wide variety of funds to choose from in the different sectors, some of which seem quite specialist/abstract/obscure. I’m not sure for example how I would evaluate the investment potential of the iShares “Inclusion and Diversity” [OPEN] fund which is offered under the banners of shifting demographics and shifting economic power.

Having said that, anyone invested in the more generic themes of say technology, China, or renewable energy would likely have enjoyed pretty decent returns in the last year as these themes emerged as some of the big winners from the global response to the pandemic.

Are megatrends a long term investment strategy for the passive investor or just the latest thing? Are you investing thematically and which themes are you backing?

2 Likes

Funnily enough I wondered the other day what had happened to BRIC. I am not a mega-trend investor, just that I have a practical understanding of tech and thought the large US operators ought to have a pandemic tailwind. Going back to the early 90s, I recall being stung by investing in a fund riding the privatisation wave in Europe. I suspect the trends you mention are a mix of genuine changes/disruption and ideas devised for clever marketing, with the latter correlated to the more abstract themes.

Perhaps the best approach for thematic investing is going for a more traditional growth area such as healthcare, which may not be a ‘mega’ trend, but ought to remain favourable for some time. That sector offers funds with proven records of success, which ought to put the odds a bit more in our favour.

Interested too to hear from others about their thematic investments.

Maynard

The fund managers at Scottish Mortgage [SMT] have talked for a long time about many of the themes that are now thought of as “megatrends’’ in their annual reports. This year was no exception with James Anderson commenting that:

“The rise of renewables and the electrification of transportation will be central to the investing world of the next twenty years at least.”

and on shifting economic power:

“the geographical centre of the global economy continues to move to Asia, generally at an accelerated pace.”

The investing approach at SMT tends to take this big picture view which in part has enabled them to increasingly make early stage investments and maximise the compounding of returns by holding over very long timescales. Given the managers’ investing approach and the nature of SMT’s holdings, perhaps SMT might even be thought of as a proxy for megatrend investing?

1 Like