Several recent empirical studies have shown that equity returns are extremely unevenly distributed, across industries, countries and individual stocks.1 They do, however, correlate with profit stream dynamics. In this context, a trends and thematic approach can help track profit streams and benefiting from them.
In the US, for instance, the small group of stocks that have created the majority of the wealth over the past decades includes household names such as Apple, Microsoft and Amazon, that have been able to benefit from structural shifts such as digitalization or the rise of ecommerce. Outside the US, stocks that have produced a disproportional amount of wealth are Tencent, Nestlé and Samsung.
The poor (industries) stay poor, the rich get rich
At a less granular level, relative profitability tends to remain steady over long intervals for most industries. Prosperous industries tend to stay prosperous while poor industries tend to stay poor, although new trends or disruptive innovations can sometimes cause long-term tail or headwinds for industries.
What’s more, the longer the timeframe, the greater the disparities between sectors tend to be. Using data covering the 1926-2019 period, we find that the software industry created USD 4.1 trillion in wealth for investors since its birth in the 1960s until now. On the other hand, the precious metals industry destroyed USD 17 billion in wealth (see Figure 1).
Figure 1: Wealth creation by industry in the US from 1926-2019
Source: CRSP, Robeco. Market: US. Time period: 1926-2019
Trends and thematic strategies strive to benefit from the profound changes constantly reshaping our socioeconomic environment. These changes include shifts related to technology (technology-driven change), regulations (policy-driven change), and culture and demographics (sociocultural and demographically driven change).
Moreover, because trends and thematic approaches typically mean abandoning rigid regional or sector classifications that often provide little added value, both in terms of evaluating the growth potential of companies and of risk mitigation through diversification, it can help investors focus their analysis effort towards the companies bound to benefit from structural trends and themes.
“
Identifying specific trends and themes, as a first step in the investment process, allows for a more useful allocation of resources.
Identifying specific trends and themes, as a first step in the investment process, allows for a more useful allocation of resources. Instead of covering all regions, sectors and individual stocks, which is very expensive and inefficient as there are more than 53,000 listed companies worldwide, full attention can be paid to all securities associated with an identified, investible trend or theme.
Through a trends and thematic approach, investors also gain an analytical edge if they understand the dynamics and processes involved in secular change, and the macro and microeconomic implications of these changes. Looking at financial markets from a trends and thematic perspective allows investors to cut through short-term noise and focus on what really matters in the long run.
The Big Book of Trends & Thematic Investing
Footnote
1See: Bessembinder, H., 2018. “Do Stocks Outperform Treasury Bills?”, Journal of Financial Economics. See also: Bessembinder, H., Chen, T. F., Choi, G. and Wei, K. C. J., 2019. “Do Global Stocks Outperform US Treasury Bills?”, working paper. See also: Bradley, C., Dawson, A. and Smit, S., 2013. “The strategic yardstick you can’t afford to ignore”, McKinsey Quarterly.
Important information
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong. This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions. The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.