Thematic investing: One eye on the future

Investment strategiesThematic investing: One eye on the future

September 10, 2021

Key things to know

  • Thematic investing identifies the catalysts for long-term transformative change. These catalysts, or themes, fall into five broad categories: Geopolitics, Society, Environment, Technology and Demographics.

  • Six emerging megatrends may hold opportunities for long-term investors: An aging population, cybersecurity, genomics, the Internet of Things (IoT), robotics, and electric and autonomous vehicles.

  • Incorporating forward-looking trends into a long-term investment plan is an important component of overall portfolio construction.

Patience is a virtue – in life and in investing. If you have the resources to invest for the long term, “patient money” can be a route to wealth expansion through time and across generations. This strategy involves exploring longer-term investments that can be much less sensitive to the potential volatility triggered by daily headlines, near-term events or shorter-term market cycles.

One approach to addressing wealth expansion with investment dollars committed over an extended period is to focus on global trends that create the potential for favorable investment opportunities. While patient-money portfolios may have been affected by shorter-term events (e.g., the bursting of the dot-com bubble, the housing bubble implosion, the recent pandemic crisis), they may also have taken advantage of a decadelong rise in the price of gold, emerging markets equities and oil during China’s historic urbanization phase.

“For investors in a wealth-expansion portfolio, the most important question becomes, ‘Am I positioned to take advantage of the changes happening in the world around me, or is my portfolio going to be disrupted by the changes taking place?’” says Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group.

Thematic investing for a wealth-expansion portfolio

Thematic investing addresses that question by identifying the catalysts for long-term transformative change. These catalysts, or themes, are less likely to be related to specific policies or the current state of the economy. Instead, they’re found in developments both nationally and globally in one of five broad categories:

  • Geopolitics
  • Society
  • Environment
  • Technology
  • Demographics

“Investors with a wealth-expansion portfolio should step away from the microscope and peer through the telescope,” says Hainlin. “They should ask if the trends and themes of the past will repeat themselves, or if the future will bring new winners and new losers.”

Thematic investing allows long-term, patient investors to focus less on today’s headlines and more on the megatrends that will shape the future.

How megatrends influence thematic investing

A megatrend is an important shift in the progress of society. While trends can persist for years, decades or even centuries, the impacts of these shifts are often not readily apparent at their beginning. The impacts of megatrends can be negative as well as positive, and some trends are more easily reversed than others.

“We believe incorporating forward-looking trends into a long-term investment plan is an important component of overall portfolio construction.”

-Tom Hainlin, national investment strategist at U.S. Bank Asset Management Group

Of all the trends that have transformed the post-war world, none has been as important as globalization. Changes that have transformed the world politically, economically and technologically, and whose effects have reverberated across the capital markets, include the fall of the Berlin Wall in 1989, the end of the Cold War, and the entry of China into the World Trade Organization in 2001. Together, these developments led to a long-term and potentially permanent shift in the world’s economies and capital markets.

Given the ongoing geopolitical and economic changes in the world, critical questions for long-term investors are:

  • Will events that helped define the past few years continue to influence and impact the markets in the years ahead, or are we at an inflection point?
  • Have past trends run their course?
  • What are the emerging trends that will define the next few years or the next few decades?

Six investment themes for the years ahead

Often building off previous trends, new megatrends are beginning to take shape. Following are six trends that may have the potential to open new opportunities for far-sighted investors.

1. The aging world population: The world is aging. The rate of global population growth is slowing down rapidly, with growth increasingly occurring among older age groups. At the same time, life expectancy is increasing. This powerful demographic shift is transforming the global economy.

2. Cybersecurity: The proliferation of computing devices and network connectivity has enabled a boom in cybercrime, and cybersecurity consists of the resources necessary to fight it. The need for improved technology, services and end user education is expected to persist over the foreseeable future.

3. Genomics: Tremendous life-saving power exists in understanding the role genes play in diseases and health risks. Using genomics to anticipate disease or tailor custom-made treatments is the next frontier. Read our deep dive into the genomics opportunity. Read more about investing in genomics.

4. Internet of Things: The Internet of Things (IoT) can harness the power of data and turn complex information into valuable insights. From the power to predict and avoid undesirable events, to the ability to vastly shorten the time it takes to launch a new product, IoT could change the way the world works.

5. The rising global middle class: The combination of urbanization and rising employment in emerging economies has led to a rise in consumer spending in emerging market economies. This is likely to accelerate in the decades ahead, led by growth in Asia.

6. Electric vehicle and autonomous vehicle (EV/AV): EV/AV is benefitting from a strong innovation cycle, with battery costs falling and technology and performance improving. A strong policy push from the world’s major economies toward greater adoption of EVs may trigger the biggest transportation shakeup in over a century.

Positioning your portfolio for the long term

Successful investors include those who can anticipate opportunities on the horizon. “We believe incorporating forward-looking trends into a long-term investment plan is an important component of overall portfolio construction,” says Hainlin. “Factors that have driven investment performance in the past provide valuable historical context but may not likely be as prevalent in the years ahead. Investors should also incorporate current considerations as well as informed inference about the future ahead when developing a forward-looking investment strategy.”

How can you act on these potential opportunities? An important consideration could include active portfolio management that can attempt to seek out specific investments within the broader market.

Learn more about how Ascent Private Capital Management® of U.S. Bank provides Investment Management, Investment Consulting and Investment Monitoring for clients with complicated investment scenarios.

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