The danger of just investing in long-term themes
Anyone who invests in themes for the long term without looking back usually misses out on a lot of returns. In addition to a purchasing policy, a sell policy is especially useful today.
- Disruptive innovation: first 400% up, now more than 50% down
- A high ESG score may be the criterion for purchase, but what is the criterion for selling off?
The risk of investing in themes
Themes are based on structural drivers that can positively influence returns over the long term. Therein lies the sting of this type of investment: the long term can be accompanied by high volatility and therefore strong corrections. Investors can become the plaything of their emotions. Those who can switch off their emotions as much as possible will ultimately achieve the highest return in the longer term. The trick is to maximise profits as much as possible while keeping your finger on the pulse for signs of overvaluation or technical sell signals.
The golden but too often forgotten tip: in addition to a purchase strategy, also record a sell strategy, with criteria for a purchase, which can also be a trigger for a sell. Those criteria are best determined by a combination of fundamental analysis, to measure quality and valuation, and technical analysis, to calculate momentum.
Disruptive innovation: first up to 400% up, now more than 50% down
Until February 2021, this theme was very popular in the investment landscape. From the low of March 2020 (corona crisis) to the high of 2021, the best-performing funds within this theme even achieved a return of almost 400%. Those who were not invested in the theme of disruptive innovation could hardly beat the market. The structural driver was that innovation would "disrupt" many traditional sectors through faster, better and cheaper applications.
That reasoning still holds true today. However, many funds are now trading more than 50% lower. Those who had a sell strategy could see that the theme had entered a melt-up and that rising interest rates had an impact on the valuation and the momentum was draining from those stocks, sending them into a long-term downward trend. These were signals to gradually move out of the theme and return to it in due course when valuation is attractive again and momentum has turned positive.
Sustainable investing (ESG)
Environment Social Governance is based on the idea that the investment can provide strong returns if the company can create value for its stakeholders (employees, customers, society and the environment) and not just for the owners.
For the sake of clarity: we subscribe to the ESG principle and will not include shares in the funds that do not score well on the ESG criteria. However, investing fully in the theme of sustainability and staying in it for years on the basis of this principle can be detrimental to your return if you do not take other factors into account.
A high ESG score may be the criterion for purchase, but what is the criterion for sell? If the company exceptionally loses its ESG label? And what if the momentum runs out of the stock (it falls into a downtrend) or the earnings evolution takes a serious blow? If these criteria are not established, the portfolio's returns can drop significantly and fuel investor fears and potentially sell at a bad time.
Tapping into global mega trends to drive long-term investment strategies
When it comes to investing, short-term and long-term investments are the most evident strategies that arise. Having to choose between them can at times, prove to be complex, as it is all about finding a compromise between how much risk investors are willing to take and how fast they want their investment to grow. To make a long story short, stock prices tend to rise in the long term, while it is harder to make accurate forecasts in the short term. Choosing a long-term investment strategy means capitalising on structural changes that may last for decades. It also proves to be efficient to overcome investors' behavioural biases. As demographics affect economies, markets, stocks, and ultimately investors, investing on the long run is about figuring out what the world might look like in a decade. Doing so, we can integrate cultural, social, and generational patterns in portfolios. One critical point to understand is that spotting themes will not necessarily lead to successful investments. Indeed, finding the future trends, identifying the winners - and just as important the losers - as well as investing at the right market price are equally important.
Defining long-term investment
Assuming that long-term investment is based on secular trends and a multiyear time horizon for value creation, thematic investing seems to be ticking all the boxes.
Indeed, this strategy is about finding companies responding to a particular need, understanding how it is being serviced and investing in companies, which can take advantage of these changing market conditions. Because few themes are constrained to one industry or geographical region, thematic investment covers part of a mega trend. By identifying and understanding relationships across sectors and regions, this strategy can give investors a competitive edge. Yet, facts must prevail over clichés to be successful.
Turning societal change into sustainable investment
Ageing population, technological innovation and urbanisation constitute some mega trends, which will dramatically affect individuals. In the same vein, these societal upheavals are already part of the daily life of any investors. So, how to turn them into tangible investments? expatwealthatwork has developed a range of investments around these developments while identifying potential winners in global markets.
By way of example, population is ageing. This trend turns out to be a demographic fact. Determining a clear way to invest in that shift is crucial. A spike in the need for healthcare providers is not enough to make it sustainable. However, investing in targeted care services gets the trend appealing by seizing investable stocks that create a long-term tilt towards the ageing population.
The rapid pace of urbanisation across the globe is leaving some cities struggling to cope with. In fact, two-thirds of the world's population will live in a city by 2050. In many instances, those cities will need state-of-the-art infrastructure including innovative solutions to sustain housing, education, and sources of energy, water and food. In this respect, urbanisation turns out to be an important driving force for growth.
Last but not least, middle class in developing countries is emerging. Despite a soft economy, household spending from these countries is growing. Then, the idea is to invest either in Western companies exposed to the consumption of these markets, or in local companies.
All in all, spotting societal shifts help bridge the trust gap. Running long-term investments that relate to investors is for expatwealthatwork a leitmotiv to reach successful performance.
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