CSCO Cisco Systems Inc

By Maitane Sardon 

Are robotics, 6G networks or autonomous vehicles powered by renewable energy the next big thing? That is what many investors are betting on.

An approach known as thematic investing, based on broad trends such as automation and climate change, has grown in popularity over the past few years. Funds that use a thematic strategy aren't bound by sector or region, which usually involves higher risk. Instead, the idea is to tap into companies that are part of -- and best positioned to benefit from -- technological, demographic and environmental changes sweeping the world.

"In a world littered with jargon and abstract financial theory, thematic investing represents a pleasingly straightforward approach to investing, " says Kenneth Lamont, senior analyst, manager research, passive strategies at Morningstar. "Thematic strategies tend to tap into powerful narratives that are often well-known to investors, such as aging populations or the shift to a digital economy, making them easy to relate to."

According to data provided by research firm Morningstar Inc., thematic investing on a global basis has tripled in size over the past five years to some $40.76 billion. In addition to theme-based funds that have popped up, some wealth advisers and brokerages have also turned to thematic investing, using its focus on long-term and easy-to-understand trends to help clients avoid making decisions based on short-term market activity.

To be sure, thematic funds shouldn't replace core fund holdings. Wealth advisers recommend holding them alongside other core funds. For someone who has a long time frame, advisers say a good portfolio could be built with a core-and-satellite approach, where 60% of the assets are split across two core equity funds and the remaining 40% across equity funds using a theme-based strategy.

If an investor believes robots will become increasingly important in the future, for example, he or she might want to consider an ETF investing in robotics and artificial intelligence, which are some of the fastest-growing segments within the tech sector.

As with every investment vehicle, a skeptical approach is needed, as some themes may be just temporary fashions that can quickly swing out of favor. What follows is a look at some of the themes that asset managers and wealth advisers think will be among the biggest of the next few years.

'Peak Globalization'

The rise of political leaders with protectionist views, embodied by the U.K.'s withdrawal from the European Union and trade tensions between the U.S. and China, is a sign that the world has reached the peak of globalization, according to Bank of America Merrill Lynch's global investment strategy team.

Globalization, with its desired goals of free movement of goods, people and capital around the world, is not coming to an end, but it has reached its highest point, the team at Merrill says.

"There will be a time frame when investors have to ask themselves these questions: How is the fact that companies are reshoring their activities going to impact their profit and loss or their cost structure? Will some of these extra costs be offset by automation?" says Haim Israel, global strategist and managing director of research at Merrill.

Barriers to international trade could present opportunities for smaller firms, local markets and such unloved real assets as commodities, farm land, real estate and precious metals. The aerospace and defense, infrastructure, and energy and water sectors may benefit from the growing focus on national security and economic sovereignty, Mr. Israel says.

'Smart' everything

Many market participants agree that technology's impact on industries, markets and people will be a key theme of the next decade.

"We are seeing an unprecedented rate of innovation and changes; what we call tech-celeration, the acceleration in growth that is based on tech," says Mr. Israel.

By the end of 2030, close to 500 billion devices will be connected to the internet, research by Cisco Systems Inc. shows. Asset managers agree: Given the amount of time we currently spend online -- 23.6 hours a week for the average American, according to the think tank Center for the Digital Future -- smart and connected devices will become ubiquitous.

"Smart meters, smart machinery, Internet-of-Things devices that can sense everything from electricity consumption to water consumption or carbon emissions; sensors and devices that can monitor traffic or surveillance equipment that can be used for future planning...all of that has a huge economic value added," says Mr. Israel.

Experts say investors should also consider how companies are managing such related emerging risks as the increasing vulnerability of users' personal information.

Defiance Quantum ETF (QTUM), which invests in companies that are involved in the development of machine-learning technology and quantum computing, was one of the top-performing thematic funds of 2019, up 48.2%.

Robotics

Technological advances are going to have huge impact on the job market.

The McKinsey Global Institute estimates that up to 800 million workers could be replaced by automation by the end of 2030. Experts say algorithms, big data, data mining and analytics to solve problems and perform tasks could affect not only blue-collar jobs but also jobs in that require more skilled labor, architecture, law and journalism.

This presents challenges and risks but also creates opportunities that investment managers should be prepared to leverage.

Entire companies will be at risk because they are going to be replaced by something more technologically advanced, says Guillaume Mascotto, vice president, head of ESG and investment stewardship at American Century Investments, a Kansas City, Mo.-based investment manager.

Climate

Many advisers expect companies and governments to address climate change and rising global temperatures this decade, which will be reflected in where they invest money.

"The move away from wood to coal and from coal to oil are energy transitions that we see historically. Now, The cost advantage is emerging for alternative clean energies, which presents investment opportunities," says David Docherty, a director of thematic investing at Schroders, a London-based asset manager that oversees $575.06 billion.

Rising temperatures will have direct and indirect impacts, Mr. Mascotto says. Direct impacts include short-term extreme weather events like stronger hurricanes, heavier rainstorms and more severe droughts. The indirect impacts are the long-term repercussions of changing rainfall, heavy flooding and sea-level rises: migration, altered crop life cycles and higher inequality.

Investors might consider investing in companies that can help reduce fossil-fuel-based emissions, including renewable-power generation or grid management. This could include investing in countries with low renewable-energy production costs, Mr. Israel says.

Some of the best-performing thematic ETFs of 2019 tap into this theme. Invesco Solar ETF (TAN) and Invesco WilderHill Clean Energy ETF (PBW) delivered annual returns of 65.7% and 61.9%, respectively, Morningstar Research says.

Ms. Sardon is a reporter for The Wall Street Journal in Barcelona. Email her at maitane.sardon@wsj.com.

(END) Dow Jones Newswires

January 05, 2020 22:18 ET (03:18 GMT)

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