Andreas Fruschki assesses niche areas investors are exploring, including artificial intelligence and animal well-being.
Historically, most asset managers have centered their investments on specific asset classes or geographic regions. But that is now starting to change with more investors looking to allocate elements of their portfolio to themes that have a strong link to everyday life.
One of the key ways that thematic investments differ from traditional investment strategies is that they can invest with fewer constraints and are generally not tied to a benchmark index. These are intrinsically very actively managed products that can embrace any asset class or region, as long as the investment derives a direct benefit from an underlying trend.
Traditional strategies, on the other hand, are frequently defined by a particular kind of investment in a certain sector, or geographic area – classifications that typically date from an earlier era, before the development of smartphones, solar power and other disruptive technologies that cross sector classifications and regions.
Being unconstrained does not mean a lack of focus on performance, however, asset managers build strategies around themes that they identify as having the potential to outperform the broader market.
Defining thematic strategies
For a trend to be considered a “thematic strategy”, it needs to meet two key criteria. First, it must represent a structural shift, typically triggered by technological, demographic or regulatory changes. Second, there must be evidence of broader investment opportunities directly related to that shift.
Over the past few years, several global trends have grown into important thematic strategies. Three of the most recent examples are artificial intelligence (AI), water and pet and animal well-being.
There is no doubt that AI will continue to be a key driver of innovation and disruption for years to come and investors will be on the lookout for investment opportunities related to AI and related technologies such as machine learning.
The investment universe includes companies developing AI and Big Data technology as well as the infrastructure that is essential to the future growth of AI – such as electronic components, semiconductors and infrastructure software.
It is also important to consider the wider universe, so not constraining an AI-focused portfolio on tech companies, but also considering companies that are benefiting from and driving the development of AI.
With environmental, social and governance (ESG) factors becoming increasingly important to investors, these three little letters are playing a key role in many thematic strategies.
Water is a prime example of this at a time when people are increasingly aware of environmental concerns and water scarcity. Population growth and improved living standards, particularly in emerging markets, have made water an increasingly scarce but essential commodity.
The world needs technological advances and water infrastructure upgrades to ensure its availability, and we have developed a strategy that invests in companies, tech and infrastructure projects that aim to improve access to this valuable resource.
Pet and animal well-being
Investment themes based on consumer trends are popular, and one example of a growing industry is pet and animal well-being. There is a strong emotional element to the pet industry, particularly with millennials (those born between 1981 and 1996), 41% of whom say that “money is no object” when it comes to their pets.
As a result, annual revenue from the global pet industry is forecast to grow from $132 billion in 2016 to $203 billion in 2025, creating significant potential opportunities for investors.
Andreas Fruschki is director of Equity Research - Europe at Allianz Global Investors.