When did you conceive the idea of thematic investing and what was your inspiration?
We first conceived of the idea of thematic investment in the mid 1990s, launching our first thematic fund in 1996. This leaves Sarasin & Partners as one of the first investors in Europe both to conceive of thematic investment as a formal management approach and to put it in to practice in a public fund.
Two key drivers influenced our early thinking back then. The first was the impact Jack Welch was having at General Electric (the largest company in the world at the time). As well as being a diversified group, Mr Welch passionately believed that GE should be number one or two in every industry that it operated in and was obsessed by what was then an emerging definition of shareholder value. We aimed to adopt these into our investment thinking via a thematic investment approach.
Additionally, two other global trends at that time, the rise of the internet as e-commerce and the e-economy as well as the rapid integration of nearly 1bn new members of the global workforce, could not be captured by any of the existing top down investment techniques of the day and seemed ideal for this newly conceived multi-year thematic approach.
Which was the first investing theme which you became engrossed in?
I found myself engrossed with the concept of ‘corporate restructuring’ as did my colleague Harry Talbot-Rice – it has been continuously deployed in our thematic approach for almost 16 years.
Looking at some of your early themes in the late 1980s and early 1990s, such as European re-structuring and growth of the Asian middle class – did they all go according to plan?
One of the greatest challenges for the thematic investor is global shocks that swamp, for a period at least, themes that had looked robust and almost inevitable. The shock of the Asian crisis that began with the Thai devaluation of 1997 and went on to generate a severe economic contraction focused on Indonesia, South Korea, Hong Kong and Malaysia for example struck at the core of our ‘emerging world’ consumer theme. Compared though to the damage suffered in local markets our theme targeted Western blue-chips rather than more fragile, poorly governed local emerging world stocks.
Were there any themes you identified which totally backfired or had to be withdrawn?
Interestingly not – there were themes that were short-lived such as ‘profiting from deflation’ which we adopted after the technology boom/bust of the early 2000s, while others (corporate restructuring and pricing power) have survived throughout the 16 years we have been managing thematic funds at Sarasin.
Which are your current favoured themes?
Intellectual property and innovation is my personal favourite. It captures first the extraordinary breadth of new technologies that are being adopted in everyday production today. In terms of shareholder impact, strong corporate cash-flow and profitability are allowing technology to be deployed far more quickly and universally than could have been imagined earlier in the decade.
Are there some current themes of the future you are working on?
Possibly, but I can’t say too much. Certainly the corporate balance sheet is becoming interesting with real and nominal interest rates at negative or near zero levels respectively across most of the developed world, while new technologies and distribution platforms are altering what it means to be commercially successful for many global brands.
Many private banks have become thematic investors. Is it increasingly difficult to be a thematic-led investor in a crowded market?
Our definition of thematic investment is rather different to other fund groups and private banks. We differentiate between themes and what we call ‘opportunity sets’, which are largely inevitable global trends often backed by powerful longer-term forces like demographics, climate change or technology. These always risk becoming crowded trades, often attracting bubble-like valuations over time, and tend to be ultimately challenging for the longer term investor. This is why we accept these largely inevitable global trends as valuable pools of overlapping investment ideas, but they are not on their own sufficient to build balanced long-term portfolios. For us, the second stage is for investors to understand how management will react to these long-term trends and how they will translate this topline growth potential into multi-year shareholder value.
Are you cynical about groups which look at themes purely as an easy way to gather assets through story-telling?
Using stories to illustrate thematic opportunities is valuable to educate and inspire the investing public, but is rarely sufficient to build durable long-term portfolios that can perform in a variety of market and macro-economic conditions. Harnessing multiple themes helps solve this by balancing portfolio distribution but requires a more sophisticated investment process. The result is a diversified, often cash-flow rich global portfolio, that targets long-term growth in what, for some years yet, will remain a frustratingly low growth world.
