Can thematic investments deliver consistent returns?
FT Investment Management Summit, 17 September 2014
Luca Paolini , Chief Strategist, Pictet Asset Management
Pictet Asset Management | For professional investors only |
Very low returns in traditional asset classes in the years ahead …
Expected annual return over the next 5 years (p.a.)
EM Asia equities
EM equities
JP equities
EM local (GBI)
Latam equities
EM Corporate
EM hard (EMBI)
DM equities
UK equities
US equities
EMU equities
Swiss equities
Eur Corp.HY
10Y US bonds
Eur Corp. IG
SBI
JPM EMU
10Y Ger Bunds -3,0%
-0,1%
-1,0%
-1,1%
10,2%
6,3%
5,2%
6,1%
1,3%
0,8%
0,3%
3,9%
3,5%
2,9%
2,7%
2,6%
2,5%
5 Y returns in USD, p.a.
14,0%
Pictet Asset Management | For professional investors only |
Source: Pictet Asset Management, as of June 2014
2
… force investors to look for sources of additional return …
TACTICAL (<6 months)
STRATEGIC
ASSET CLASS
INVESTMENT
STYLE
PRODUCTS
EM
EM
Opportunistic
Valuation anomalies
Market Neutral
Absolute Return
Smart Beta
SECULAR (>5 years) EM,
Alternatives
Structural growth
Mega and macrotrends
Thematic investing
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… and to overcome the traditional allocation straightjacket
Traditional Investing Thematic Investing
• Benchmark driven
• Market Cap constraints : focus on past winners
• Regions easy to invest (e.g. developed)
• Non-benchmark view : focus on future winners
• Exposure to secular pockets of growth
• No geographical constraints
• No market cap constraints
• No sector constraints : Thematic investing is a cross-sector, is looking for thematic purity
• Broaden diversification
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From Megatrends to Investment Themes
Network Economy
Demographic Development Sustainability
Focus on Health Knowledge & Production Society
Polarization
Generics
Biotech
Globalization
Premium Brands
Commercialization
Security
Water
Timber
Immaterialization
Digital Communication
Democratization
Agriculture
Clean Energy Acceleration & Complexity
Individualization
Economic Growth
Technology Development
Source: Copenhagen Institute for Futures Studies
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Premium Brands - From Megatrends to Investment Themes
Polarization
Spending is growing fastest at the two extremes of the consumer spectrum: cheap and luxury brands are thriving.
Globalization
Demand for branded goods has spread far beyond the developed world: emerging
markets now account for over 40% of premium brands demand; Chinese consumers will account for almost half of global luxury goods spending by 2025.
Demographic Development
Rapid growth of the middle class in emerging- market consumers, keen to adopt western
lifestyle standards; consumption also fuelled by both the growth and the ageing of the world’s population as over 50s will be wealthier and more leisure oriented than ever.
Immaterialization
The evolution from the traditional to “new
luxury”brand, which is more diversified, creative and aspirational and targets a broader consumer base.
Premium Brands opportunity
Individualization
Growing sophistication of local consumers and emergence of new heavy spender segments (empowered women, entrepreneurs, celebrities).
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Economic Growth
Demand for luxury goods is expected to rise by c6-8% CAGR 2011-2015, boosted by the economic growth across emerging markets.
Source: Copenhagen Institute for Futures Studies
6
Water - From Megatrends to Investment Themes
Urbanisation
As the world’s population grows, so too will the number of and size of its urban areas.
Currently, just under half of the world’s population lives in cities; by 2030, the UN predicts that 53% of us will be living in cities – that’s close to 4 billion people
Focus on Health
Poor water quality as a result of lack of sanitation infrastructure and waste water treatment facility is a major health threat to humans
Sustainability
Of the world’s total water supply, only 3% is fresh water. And of that 3%, only a quarter is useable
– or unpolluted – water.
The supply could be further reduced by changes in the world’s climate. Shifts in rainfall patterns, the steady disappearance of glaciers and changing river flows will each have a negative effect on the availability of fresh water, the UN says.
Water Opportunity
Commercialization
The process of increasing the efficiency of a sector by transforming it into a commercial business. For
Water this megatrend is referring to the team up of private companies and public bodies (called Public private partnerships) to provide water services to households and businesses.
Pictet Asset Management | For professional investors only |
Economic Growth
Demand for water is expected to rise by over 50% as population growth increases water use among farmers, industry and households.
In the period 2000 to 2050, consumption of water among both farmers and municipalities is expected to have risen threefold; in industry water use is set to double. Water availability is a necessary condition for economic growth.
Source: Copenhagen Institute for Futures Studies
7
Performance of Investment Themes
Performance of MSCI World Versus Pictet Theme Strategies since September 2009 (in
USD, gross of fees)
250.00
200.00
150.00
100.00
50.00
0.00
09.2009
GMS Timber
09.2010
Clean Energy Water
09.2011
Biotech Generics Digicom
09.2012
Premium Brands Security
09.2013
Agriculture Index MSCI World
Pictet Asset Management | For professional investors only |
Source: Pictet, as of September 8 th , 2014, in USD, gross of fees
8
Benefits from including themes in a portfolio
Individual risk / return profiles compared to MSCI World since inceptions
Volatility
Pictet Asset Management | For professional investors only |
Return
Source: Pictet Asset Management, GIPS, MSCI, Bloomberg, as at 31 July 2014
9
Investment Themes in a Global Portfolio
Thematic overlay
(higher active weights in core portfolio)
Core-satellite approach (thematic baskets)
Variable weights – themes and subthemes
Fixed weights
Multi-asset
thematics (equities, fixed income, alternatives)
Advantages
• Simple
• No change in portfolio construction
• Longer investment horizon
• Stronger focus
• Reduced biases
• Bigger pool of available securities
• More refined risk/return profile
Constraints
• Unwanted biases
• Inconsistency of investment horizon
• Requires thorough knowledge of themes
• Requires dedicated teams
• Complexity
• Requires sophisticated asset allocation capabilities
Pictet Asset Management | For professional investors only | 10
Check list for theme assessment
Criteria Definition
Liquidity &
Thematic purity
Pure and liquid portfolio Feasible investment portfolio with assets > USD bn 1 @ thematic purity > 20% where 50% of the assets can be liquidated in five trading days @ 20% of average trading volumes
Diversification Low overlap with traditional indices
Expected outcome
Robust & attractive riskreturn profile
Overlap with MSCI World < 20%
Expected risk return profile beats
MSCI World (Sharpe ratio)
Materiality Measurable thematic drivers with material impact on value drivers
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Theme withstands stress test through different scenarios
Materially accretive and measureable megatrend related impact to value drivers (growth, margins, risk premium)
11
Investment Themes in a Global Portfolio – Passive or Active?
›
Megatrends known but …
› Megatrends are not per se value-creating (e.g. democratization)
›
Long investment horizon = low turnover = low transaction costs
›
Exposure to themes (“Thematic Purity”) and shifts between sub-themes are key
›
Megatrends often implies disruptive technologies: pick winners and losers (e.g
Apple vs. Nokia)
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Evolution of portfolio – Clean Energy
Thematic breakdown by fund
57%
20%
18%
31.12.2007
9%
27%
52%
46%
32%
68%
36%
23%
19%
57%
17%
25%
29%
35%
12%
31.12.2008
31.12.2009
31.12.2010
31.12.2011
Energy Efficiency Low Carbon (incl. Natural gas) Renewables Cash
31.12.2012
Pictet Asset Management | For professional investors only |
11%
24%
64%
31.12.2013
Source: Pictet Asset Management
13
Conclusions
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Pictet Asset Management | For professional investors only | 14
Biography
Luca Paolini
Chief Strategist
Strategy team
Luca Paolini joined Pictet Asset Management in 2012 as Chief Strategist.
Before joining Pictet, Luca worked as an Equity
Strategist at Credit Suisse Securities, responsible for asset, regional and sector allocation. From 2005 to
2007, he was Investment Strategist at Union
Investment. Luca started his career in 2001 at Allianz
Dresdner Asset Management as a trainee then assistant vice president, covering asset allocation and investment strategy.
Luca holds a Master degree in International
Economics and Management from SDA Bocconi
School of Management in Milan, and a Laurea
Magistrale in Political Sciences from the University of
Bologna.
Pictet Asset Management | For professional investors only | 15
Pictet Asset Management www.pictet.com
www.pictetfunds.com
This marketing material is issued by Pictet Funds (Europe) S.A. It is neither directed to, nor intended for distribution or use by, any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on www.pictetfunds.com or at Pictet Funds (Europe) S.A., 15, avenue J. F. Kennedy L-1855 Luxembourg.
The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet
Funds (Europe) S.A. has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
Pictet Asset Management | For professional investors only | 16
Pictet Asset Management | For professional investors only |
The Development of Thematic Investing at Pictet Asset Management
Leading thematic investor with over USD 20bn in assets under management
Pictet-Biotech
The world’s first biotech-focused fund
Repositioned
Pictet-
Telecom
Pictet-Leisure
1998
Pictet-Water
The first fund to invest in the value chain of the world’s most critical resource,
Water
2000
2004
Pictet-Generics
A pioneering fund focusing on lowcost drug makers
2010
Pictet-Env. Megatrend
Selection - Strategic exposure to Water, Clean
Energy, Timber & Agriculture
Pictet-Global Megatrend
Selection
Exposure to all of our thematic equity strategies
Pictet-Timber
Investments span across the full timber value chain, a scarcely researched resource of major relevance for the world
Pictet-Digital Communication
Interactivity as a key driver in communication, explores opportunities of the digital world for business and individuals
2008
2007
2009
Repositioned
Pictet-Premium
Brands
Focuses on the strong consumption trend of luxury and aspirational goods and services
2005
2006
Pictet-Agriculture
Focuses on the world’s food value chain
Pictet-Clean Energy
Invests in the global energy transition, favoring carbon-free or low-carbon energy sources and energy efficiency
Pictet-
Security
Invests in companies in the physical and IT security business
(excludes weapons and nuclear energy)
1997
1995
Source: Pictet Asset Management, (includes AUM from Japanese utility funds, but excludes thematic mandates)
Pictet Asset Management | For professional investors only | 18
Decision parameter: Risk return profiles
Fund Start date
Biotech Nov-95
Water
Generics
Jan-00
Jun-04
Premium Brands Jun-05
Security Jan-06
Clean Energy
Digicom
Timber
Agriculture
May-07
Jun-08
Nov-08
Jun-09
Annualised return Volatility
Fund MSCI Fund MSCI
14.53
9.5
10.69
10.36
8.91
-0.07
13.51
14.58
12.7
6.63
3.7
7.08
6.77
4.54
3.34
6.25
14.42
12.61
29.42
15.62
16.77
22.18
16.84
25.91
18.14
25.16
17.96
15.6
16.01
15.9
16.47
17.6
18.18
18.78
16.53
14.53
Pictet Asset Management | For professional investors only | rf
3.7
3.1
2.6
2.5
2.1
1.9
1.6
1.5
1.5
Sharpe ratio
Fund MSCI
0.49
0.61
0.63
0.46
0.53
0
0.74
0.57
0.7
0.19
0.04
0.28
0.26
0.14
0.08
0.25
0.78
0.77
Source: Pictet, as of September 8 th , 2014, in USD
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Themes sales exposure
No Geographical constraints
Funds Europe
Premium Brands
Security
Digital
Communication
Clean energy
Agriculture
Timber
Water
Biotech
Generics
30%
25%
15%
14%
17%
15%
32%
24%
10%
Pictet Asset Management | For professional investors only |
North America Emerging Markets
30%
48%
60%
52%
43%
50%
38%
65%
40%
40%
15%
20%
34%
30%
30%
26%
8%
40%
RoW*
0%
8%
5%
0%
10%
5%
3%
3%
10%
Source: PAM, May 2014, * mainly Japan
20