Equity investors have been recently exposed to the effects of the earnings reporting season, which has been rather good on the whole, but as always it would only take one disappointment for the market to punish a stock. Meanwhile, investor uncertainty persists over upcoming elections in France and Germany and protectionism risks and this will likely continue to weigh on financial markets.
To free themselves of this market short-termism, some investors are strategically shifting their investment and stock-picking to a particular management style (value, growth, income, low volatility, etc.) or a particular investment universe, be it geographical (e.g. emerging markets), market capitalisation (e.g. small caps), sector or theme.
Thematic investing requires a medium to long-term view
The strategic choice of an investment universe can reflect various objectives – diversification, performance and/or strong convictions. In all cases, this critical choice must be made on a medium or long-term basis to avoid excessive exposure to the market environment that is prevailing at the time of investing.
Thematic equity investing meets these objectives by offering investors exposure to several sub-sectors to generate excess returns commensurate with the chosen theme. These themes seek to capture growth from companies that offer sustainable solutions to future economic challenges. There are indeed many such challenges, including ageing population, disruptive technologies, climate change, healthcare and new consumer trends. These are concrete challenges that speak to investors and attract the most interest from them.
There is growth potential in thematic investing
Our role as an active fundamentals-based manager is to identify those companies that have the potential to build and develop a competitive edge in the chosen theme. Momentum within these themes is growing as companies emerge, merge and innovate. So we believe this is a good time to fall back on forward-looking fundamental research that analyses companies in all their dimensions, including their business activity, products, margins and social, environmental and governance (ESG) practices. It is also necessary to assess the company’s results and potential share price upside based on how sustainable its strategy is.
Through our active selection implemented by experienced managers covering an increasingly international universe, we seek to identify the leaders of tomorrow offering and/or benefiting from solutions addressing these structural challenges. Our objective is to reconcile performance and consistency with the chosen theme. To promote such consistency, we define a minimum threshold exposure linked to the theme (e.g. percentage of the company’s revenues).
BNP Paribas Investment Partners has successfully launched thematic equity strategies to address structural challenges such as climate change (through our partner Impax Asset Management) and the ageing of the population via a strategy on the theme of human development. This thematic strategy invests in companies that help meet human beings’ basic needs by providing access to healthcare, education and a quality diet.
Thematic investing as a source of portfolio diversification
We continue to enrich our offering to address other challenges. Our aim is to have an attractive and innovative range of equity strategies offering real diversification between the themes and within each strategy. This complementarity allows us to stand out and meet the needs of investors seeking medium-term performance potential while giving some meaning to their investments.
Based on forward-looking fundamental research, thematic equity investing naturally illustrates the value of active management in a changing world. It also frees investors from the constraints that benchmark-related investing imposes on them.
Published on 11 April 2017