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10 Oct 2023

Thematic Investing — Navigating the Investment Landscape

In the dynamic world of investing, identifying and capitalising on emerging themes can be key to long-term investment success. While change often creates near-term noise, Linda Eedes writes that it also creates opportunities for patient, forward-thinking investors.

Thematic investing is about recognising secular trends and marrying them with individual investment opportunities. This means understanding how broad market forces will affect future earnings of companies in the investment universe. Over the long term, share prices always respond to rising earnings.

Foord’s ‘top-down’ investment approach allows us to carefully assess risks and opportunities on the investment horizon. We establish thematic parameters that identify sectors or regions offering the potential for superior returns. This is complemented by our ‘bottom-up’ stock selection process, which populates portfolios with securities that we believe will achieve the best long-term returns for an acceptable level of risk.

The first step in thematic investing is identifying the themes themselves. These can range from sweeping, broad-based trends to more specific, micro-level ideas. But how do we pinpoint them? Foord uses a blend of keen observation and rigorous research. We keep a watchful eye on anything that might significantly affect economic growth, company earnings or global operations. This involves monitoring trends that could reshape entire sectors.

We have written before about global and local themes that have captured our attention. A good South African example was the correct premise that massive government spending on social grants under the Jacob Zuma administration would drive record consumption expenditure to the benefit of the SA retail sector. A current theme is South Africa’s growing debt burden and rising risk of a debt crisis. We wrote about this in last quarter’s Foreword.

Other global examples include the internet of things, global food security, the global energy transition, digitalisation, the rise of the Asian middle class and an ageing first-world demographic driving rising expenditure across the whole health care spectrum

One of the questions that often arises is what the time horizon should be for thematic investments. At Foord, we adopt a pragmatic and flexible perspective. While some themes indeed play out over the long haul, others may offer shorter term opportunities. There is no rigid adherence to timelines. Instead, we prioritise the value and potential of each theme.

While time horizons may differ, timing can be a crucial element in thematic investing. We look for the right entry points — considering many factors such as current company valuations and potential catalysts. Technical analysis also guides our timing decisions. We assess whether a theme has experienced excessive price inflation or if it remains undervalued. However, we recognise that at times the strength of a theme justifies entry at a higher price, given the long-term potential it holds.

Finally, it's essential to acknowledge that not all themes play out as expected. Unforeseen events —such as regulatory changes, market shocks, technological advancements, or economic shifts — can disrupt even the most promising themes. Company-specific issues and changing consumer preferences may also pose challenges, while geopolitical dynamics and market sentiment can also introduce uncertainty into the investment landscape.

 

 

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