Trends and thematic investing: cutting through short-term noise

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.

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).

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. 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.

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.