thematic investing pictet asset management | for professional investors only | can thematic...
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Thematic Investing
Pictet Asset Management | For professional investors only |
Can thematic investments deliver consistent returns?
FT Investment Management Summit, 17 September 2014Luca Paolini , Chief Strategist, Pictet Asset Management
Very low returns in traditional asset classes in the years ahead …
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Source: Pictet Asset Management, as of June 2014
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
14.0%
10.2%
6.3%
6.1%
5.2%
3.9%
3.5%
2.9%
2.7%
2.6%
2.5%
1.3%
0.8%
0.3%
-0.1%
-1.0%
-1.1%
-3.0%
5 Y returns in USD, p.a.
Pictet Asset Management | For professional investors only |
Expected annual return over the next 5 years (p.a.)
… force investors to look for sources of additional return …
3Pictet Asset Management | For professional investors only |
ASSET CLASS
INVESTMENT STYLE PRODUCTS
TACTICAL (<6 months) EM Opportunistic
Market Neutral
Absolute Return
Smart BetaSTRATEGIC EM Valuation anomalies
SECULAR (>5 years) EM,
Alternatives
Structural growth
Mega and macro-trends
Thematic investing
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… and to overcome the traditional allocation straightjacket
Thematic Investing Traditional Investing
• 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
• Benchmark driven
• Market Cap constraints : focus on past winners
• Regions easy to invest (e.g. developed)
Pictet Asset Management | For professional investors only |
From Megatrends to Investment Themes
5Pictet Asset Management | For professional investors only |
Network Economy
Sustainability
Knowledge & Production Society
Demographic Development
Focus on Health
ImmaterializationPolarization
Democratization
Acceleration & Complexity
Globalization
Commercialization
Individualization Technology Development
Economic Growth
Digital Communication
Biotech
AgricultureClean Energy
Security
Timber
Premium Brands
Water
Generics
Source: Copenhagen Institute for Futures Studies
Premium Brands - From Megatrends to Investment Themes
6Pictet Asset Management | For professional investors only |
Spending is growing fastest at the two extremes of the consumer spectrum: cheap and luxury brands are thriving.
Polarization
GlobalizationDemand 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.
IndividualizationGrowing sophistication of local consumers and emergence of new heavy spender segments (empowered women, entrepreneurs, celebrities).
Economic GrowthDemand for luxury goods is expected to rise by c6-8% CAGR 2011-2015, boosted by the economic growth across emerging markets.
The evolution from the traditional to “new luxury”brand, which is more diversified, creative and aspirational and targets a broader consumer base.
Immaterialization
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.
Demographic Development
Premium Brands opportunity
Source: Copenhagen Institute for Futures Studies
Water - From Megatrends to Investment Themes
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Poor water quality as a result of lack of sanitation infrastructure and waste water treatment facility is a major health threat to humans
Focus on Health
UrbanisationAs 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
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.
Sustainability
Economic GrowthDemand 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.
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.
Commercialization
Water Opportunity
Source: Copenhagen Institute for Futures Studies
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Performance of Investment Themes
Source: Pictet, as of September 8th, 2014, in USD, gross of fees
Performance of MSCI World Versus Pictet Theme Strategies since September 2009 (in USD, gross of fees)
Pictet Asset Management | For professional investors only |
0.00
50.00
100.00
150.00
200.00
250.00
09.2009 09.2010 09.2011 09.2012 09.2013
GMS Timber Clean Energy Water Biotech Generics Digicom Premium Brands Security Agriculture Index MSCI World
Benefits from including themes in a portfolio
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Individual risk / return profiles compared to MSCI World since inceptions
Source: Pictet Asset Management, GIPS, MSCI, Bloomberg, as at 31 July 2014
Pictet Asset Management | For professional investors only |
Volatility
Return
Investment Themes in a Global Portfolio
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Advantages Constraints
Thematic overlay
(higher active weights in core
portfolio)
• Simple
• No change in portfolio construction
• Unwanted biases
• Inconsistency of investment horizon
Core-satellite approach (thematic baskets)
•Variable weights – themes and sub-themes•Fixed weights
• Longer investment horizon
• Stronger focus
• Reduced biases
• Requires thorough knowledge of themes
• Requires dedicated teams
Multi-asset thematics
(equities, fixed income,
alternatives)
• Bigger pool of available securities
• More refined risk/return profile
• Complexity
• Requires sophisticated asset allocation capabilities
Pictet Asset Management | For professional investors only |
Check list for theme assessment
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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
Overlap with MSCI World < 20%
Expected outcome
Robust & attractive risk-return profile
Expected risk return profile beats MSCI World (Sharpe ratio)
Theme withstands stress test through different scenarios
Materiality Measurable thematic drivers with material impact on value drivers
Materially accretive and measureable megatrend related impact to value drivers (growth, margins, risk premium)
Pictet Asset Management | For professional investors only |
Investment Themes in a Global Portfolio – Passive or Active?
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› 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)
… Active portfolio management is required!
Pictet Asset Management | For professional investors only |
18% 12%25% 29% 35%
57%64%
20%17%
19%23%
36%
32% 24%
57%68%
52%46%
27%
9% 11%
31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013
Energy Efficiency Low Carbon (incl. Natural gas) Renewables Cash
Evolution of portfolio – Clean Energy
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Thematic breakdown by fund
Source: Pictet Asset Management
Pictet Asset Management | For professional investors only |
Conclusions
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› Intersection of megatrends define thematic investment strategies
› Exposure to a scarce resource: secular growth
› Thematic investing improves risk/return profile
› Core-satellite approach preferred
› Active management required: shifts between themes and identification of thematic purity
Pictet Asset Management | For professional investors only |
15
Biography
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.
Chief Strategist
Strategy team
Luca Paolini
Pictet Asset Management | For professional investors only |
For more information,please contact
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Pictet Asset Management
16Pictet Asset Management | For professional investors only |
APPENDICES
Pictet Asset Management | For professional investors only |
The Development of Thematic Investing at Pictet Asset Management
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2008
Pictet-Leisure
2005
2004
1998
2006
1995
2007
1997
Pictet-BiotechThe world’s first biotech-focused fund
2000
Pictet-WaterThe first fund to invest in the value chain of the world’s most critical resource, Water
Pictet-SecurityInvests in companies in the physical and IT security business (excludes weapons and nuclear energy)Pictet-
Telecom
Pictet-GenericsA pioneering fund focusing on low-cost drug makers
Pictet-Premium BrandsFocuses on the strong consumption trend of luxury and aspirational goods and services
Pictet-Digital CommunicationInteractivity as a key driver in communication,
explores opportunities of the digital world for business and individuals
Leading thematic investor with over USD 20bn in assets under management
Pictet-Clean EnergyInvests in the global energy transition, favoring carbon-free or low-carbon energy sources and energy efficiency
2010
2009 Pictet-AgricultureFocuses on the world’s food value chain
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-TimberInvestments span across the full timber value chain,
a scarcely researched resource of major relevance for the world
Repositioned
Repositioned
Source: Pictet Asset Management, (includes AUM from Japanese utility funds, but excludes thematic mandates)
Pictet Asset Management | For professional investors only |
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Decision parameter: Risk return profiles
Source: Pictet, as of September 8th, 2014, in USD
Pictet Asset Management | For professional investors only |
Fund Startdate
Annualised return
Volatility rf Sharpe ratio
Fund MSCI Fund MSCI Fund MSCI
Biotech Nov-95 14.53 6.63 29.42 15.6 3.7 0.49 0.19
Water Jan-00 9.5 3.7 15.62 16.01 3.1 0.61 0.04
Generics Jun-04 10.69 7.08 16.77 15.9 2.6 0.63 0.28
Premium Brands Jun-05 10.36 6.77 22.18 16.47 2.5 0.46 0.26
Security Jan-06 8.91 4.54 16.84 17.6 2.1 0.53 0.14
Clean Energy May-07 -0.07 3.34 25.91 18.18 1.9 0 0.08
Digicom Jun-08 13.51 6.25 18.14 18.78 1.6 0.74 0.25
Timber Nov-08 14.58 14.42 25.16 16.53 1.5 0.57 0.78
Agriculture Jun-09 12.7 12.61 17.96 14.53 1.5 0.7 0.77
Themes sales exposure
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No Geographical constraints
Pictet Asset Management | For professional investors only |
Funds Europe North America Emerging Markets RoW*
Premium Brands 30% 30% 40% 0%
Security 25% 48% 15% 8%
Digital Communication 15% 60% 20% 5%
Clean energy 14% 52% 34% 0%
Agriculture 17% 43% 30% 10%
Timber 15% 50% 30% 5%
Water 32% 38% 26% 3%
Biotech 24% 65% 8% 3%
Generics 10% 40% 40% 10%
Source: PAM, May 2014, * mainly Japan