This article looks at how we leverage investment themes to inform our decisions as we seek to capture attractive returns over the long term.
It will provide the following:
- A focus on our nine primary themes
- Greater detail on how our themes work in practice
- Three stock examples which can be identified through our themes
- An overview of our primary and sub-investment themes.
The start of 2020 has been a difficult period for everyone as the global pandemic has taken hold, and there no doubt remain very challenging weeks and months ahead. We do hope, nonetheless, that this article will demonstrate how our thematic framework can help to guide us through the near-term noise to identify truly long-term structural growth stories.
As we discussed in Harnessing the power of global equity (an earlier article), the framework of our global investment themes is a vital input to informing stock selection.
The specific application of these themes to help identify suitable investments for our strategies is dynamic and may evolve over time. However, our themes remain a bedrock of our process and, alongside our analysis of environmental, social and governance (ESG) factors, they infuse a wide set of considerations and add texture to our portfolio decisions.
Our themes provide a framework to help us to think about the big changes that are affecting our investable universe and to filter out any distractions. They do not tell us specifically what to buy or sell; as our themes concern long-term trends, they normally point to both winners and losers in different areas of the market. How we apply our themes to investment opportunities will transition over time, but below, we set out our thought processes around our nine primary themes to demonstrate how they are influencing our investment thinking.
Unprecedented population growth, technological developments and industrial advances have created stress across the planet’s climate, natural resources and wildlife. The resulting efforts to combat climate change have led to great innovation from ‘green enablers,’ many of which we believe are well positioned in a world that is increasingly environmentally conscious.
We see the global economy’s ever-increasing levels of debt as the central reason why the global recovery (which began in 2009) has been so dissatisfying. We favour companies that can to grow in a slow-growth environment, with strong franchises that can generate good cash flows, while always being mindful of the valuations of such securities. We find such qualities in certain technology, consumer staple, health-care and business services companies, which we believe can grow independently of the credit and policy cycles.
We have maintained a significant underweight to the financial sector for some time. The increased scrutiny and regulatory burden of the banking sector is likely to be maintained, and excessive levels of debt provide a growth challenge for banks in particular.
China’s robust growth after the last financial crisis helped to pull the world economy out of recession, but now the Chinese economy itself has been on a borrowing binge and seems to require ever more credit to generate slowing levels of growth. We have no exposure to many commodities and mining stocks which benefited greatly from China’s once-insatiable demand owing to urbanisation and a speculative property boom.
Increasing internet use has changed the consumer landscape, leading to increased choice and price transparency. Consumers can access and compare product information, as well as online reviews and influencer preferences, and as a result, consumer companies no longer control the narrative.
Our smart revolution theme reflects how a range of technologies are making networks, systems, processes and products of all kinds increasingly responsive and intelligent. The revolution in connectivity is leading to profound changes to business models for many companies across the world and in many sectors. These technological advances are likely to lead to increased productivity.
The world has made the transition from connecting places (landline phones), to connecting people (mobile phones), to connecting devices (satellite navigation). The rapid rise in the ‘internet of things’ is transforming lifestyles and traditional business practices globally.
Policymakers see sustainable growth as requiring more economic intervention, market manipulation and regulation. We believe this has led to increased volatility, inflated asset prices and poor capital allocation.
Populations are shifting significantly – with unprecedented ageing in mature economies, and income growth driving changes in developing economies. This leads to differences in growth and fiscal burdens.
Demand for health-care products and services is increasing as ageing populations fuel demand in developed economies, and expanding incomes and changing lifestyles create new markets in the emerging economies.
Having provided a broad overview of how we use our themes to inform our investment decisions, we will now drill down in more detail to show how we use them to help unearth investment ideas.
One area that our smart revolution primary theme draws us to is 3D printing. From the creation of engine components and medical equipment to recreating facsimile human organs, 3D printing throws up a number of interesting opportunities as it holds the potential to revolutionise many scientific and industrial processes.
Just look at some of the potential applications of 3D printing: imagine a world where a pair of perfectly fitting shoes could be tailor-made and printed while you shop and made ready for collection within an hour, or even one where healthy human organs could be printed quickly and efficiently for use in life-saving transplants. These are just two of the applications scientists and developers of 3D-printing machines are working to support.
First developed in the mid-1980s, 3D-printing processes allow specialist printers to make physical objects from a three-dimensional digital model, most commonly by printing layer upon layer of base materials such as alloy particles until a 3D object emerges.
Over time, unpredictable and inefficient 3D-printing systems have given way to greater precision and flexibility in the materials printers can support. While 3D printing is, for now, mainly a specialist and niche manufacturing process, some feel it has huge economic and market potential.
While 3D printing is, for now, mainly a specialist and niche manufacturing process, some feel it has huge economic and market potential.
It is estimated that the 3D-printing market will be worth US$32bn by 2025, and over US$60bn by 2030 in the oil and gas industry alone, with applications in areas as diverse as health care and biotechnology, food production, architecture, vintage car repair, avionics and jewellery manufacture all holding significant potential.1
While some manufacturers have tried to market 3D-printed toys and other novelty products, our view is that these markets are largely unviable and unsustainable because alternative processes, such as injection moulding, are much cheaper. Instead, we believe the 3D-printing focus will increasingly fall on high-end engineering and processing applications.
From an industrial application perspective, 3D printing is now much more focused on industrial precision applications like turbines and aviation engine manufacture. The processes 3D printing involves are very good at producing intricate parts such as aviation components which fit inside each other and must be precision- crafted. This efficiency of design can also mean lighter aircraft, which can help to reduce fuel consumption, which also chimes with our Earth matters sub-theme concerning efficient infrastructure.
Defence is another sector increasingly exploiting 3D-printing technologies. In the US, engineers at the Army’s Armament Research, Development and Engineering Center have developed military hardware via 3D design.2
Elsewhere, the Royal Australian Navy this year announced it was to deploy a metal 3D printer in order to supply spare parts for its patrol vessel fleet.3
As the technology behind it improves we are likely to find more and more everyday uses for it. Despite some ethical concerns from civil liberties groups, governments will also probably continue to use and develop these systems, ostensibly for security purposes.
Artificial intelligence and facial-recognition technology
Facial-recognition technology is another area that holds significant positive potential for other business sectors where there are a range of potential applications. It is an area of opportunity which sits in our security sub-theme, which falls under our net effects primary investment theme.
In the UK, what started as a closed- circuit television (CCTV) revolution in the 1990s is increasingly embracing facial-recognition technologies. In theory, these services – which are used to identify known individuals against an existing computer database – can help the police and intelligence services pinpoint known criminals, apprehend potential offenders and prevent crime. In practice, their use has proved more problematic. Fears of a ‘Big Brother’-style society with constant TV monitoring of individuals have preoccupied civil liberty groups concerned with the blanket use of CCTV ever since its introduction.
In London alone there are now over 420,000 CCTV cameras installed – with various plans to upgrade these for facial recognition and other uses and introduce so-called smart cameras in more public and private spaces.4
While we believe there are some legitimate ethical concerns about certain uses of facial-recognition technology, we are optimistic that more positive applications can be found for this technology and believe that it is area of rich potential for software and electronic component manufacturers.
While there have been reports of potential abuses of facial recognition in some more authoritarian emerging-market regimes, there are also some far more benign applications for this technology. Many airports are now widely using facial recognition to speed up passport checks, and some smartphone apps employ similar technology which allow users to unlock their phones via their facial image.
At a domestic level, there are some ingenious uses for facial recognition, such as video doorbells which can scan the image of callers and match them against visitors permitted access. At a retail consumer level we also see rich potential for this technology in creating more targeted advertising.
In the future, electronic advertising boards and pillars could include facial and mood recognition technology or gauge the age, broad socio-economic profile or even mood of people viewing them, and the display unit could change the adverts it shows to better suit the audience. This type of device could become a common feature of shopping malls in the future.
We anticipate that the main beneficiaries of this technology will be micro-chip and software manufacturers, as well as data and internet service providers. As the technology behind it improves, we are likely to find more and more everyday uses for it. Despite some ethical concerns from civil liberties groups, governments will also probably continue to use and develop these systems, ostensibly for security purposes. Indeed, we are already witnessing governments looking to technology to gain a level of control over the spread of the coronavirus pandemic.
Given the continuing and broadly held concerns over terrorism and crime – and barring some serious backlash over the use of facial-recognition systems – it is also doubtful that any government would be willing to legislate in a way that would block its own ability to use it.
Below, we drill down to the stock level to show how our primary and sub-investment themes can help us to identify investment opportunities.
Three stock examples
The pre-eminent pan-Asian insurance company, it offers exposure to growth well in excess of GDP from the expanding middle class’s need for savings and health-care products.
As its critical mass and benefits of scale accelerate, a virtuous circle is ensuing as new businesses self-fund and margins expand.
We have a high regard for its leadership team and its effective management of both the underlying business and the balance sheet, which will be crucial as it grows into an environment of higher regulatory hurdles as well as potential end-market volatility from its exposure to the emerging world.
Most of us are aware of the company as being ubiquitous on our desktops through its Office suite of software, but its thematic attractions are manifold and driven primarily by themes we identify as smart revolution and net effects.
In 2009, the stock had more than halved from its valuation peak, and the company was seemingly mature and already highly penetrated into corporate IT infrastructure through its original core offering.
However, a series of well-judged decisions, such as the acquisitions of Skype and LinkedIn, allowed the company to extend its reach beyond its traditional markets and create a valuable ecosystem of products, services and, crucially, data collection.
In the meantime, a change of pricing model for its traditional software meant that this part of the business became consistently and enviably cash positive. Last but not least, Microsoft is now one of the major players in cloud computing, which means it stands to be a significant beneficiary from the exponential growth in data storage which is likely to continue for some time.
The stock’s rating has benefited considerably over the last decade, but its thematic and fundamental attractions remain strong.
STOCK: WOLTERS KLUWER
Predominantly a publishing-related firm with strong positions in the legal, health-care and financial sectors, where it supplies information and analysis to a professional audience, Wolters Kluwer has been able to leverage the advantages of online infrastructure to its advantage without significant disruption to its basic business model.
The ability to grant access to content via electronic means is both quicker and more convenient for both provider and client base, as well as saving costs for Wolters Kluwer. Furthermore, its subscription model leads to reliable and highly predictable free-cash-flow generation and relatively stable revenue streams.
Finally, below we lay out our nine key themes with some of the key sub-themes which fall under them. This demonstrates how our global thematic framework is applied to our investment thinking, alongside our rigorous bottom-up conventional and ESG analysis.
The ongoing Covid-19 pandemic continues to take a heavy social and economic toll on the world, and we are still at the very early stages of any recovery.
Nevertheless, the macro backdrop will eventually change, and bring with it new challenges as well as new opportunities for active global investors.
Through our investment themes, backed up by our rigorous proprietary financial and ESG analysis, we will seek to ensure that we can adapt to the evolving landscape.
In our view, using our investment themes as a guiding framework to select securities and create portfolios helps us to look through near-term noise, and to continue to build on our long-term record to the benefit of our clients.
1 GlobalData. ‘3D Printing in Oil & Gas – Thematic Research’. September 2019.
2 Army Technology. ‘Made to measure: the next generation of military 3D printing’. 23 January 2018.
3 Computer World. ‘Royal Australian Navy gets ‘world first’ 3D printers’. 21 November 2019.
4 FT. ‘Dragnet surveillance’. 2 August 2019.
Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.
This is a financial promotion. These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors.
Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.