‘The trend is your friend’, as the saying goes. Five years ago Robeco launched the Global Growth Trends Equities strategy. On the eve of this anniversary we talked to Henk Grootveld and Marco van Lent on the past, present and future of trends investing.
“Powerful growth trends are shaping the future of our world, driven by forces such as demographics and technological innovation. Capturing these trends can bring attractive rewards over the long term. We had already established teams managing trend funds covering specific areas, such as new world financials, global consumer trends, smart energy and healthy living. So launching the Global Growth Trends Equities strategy was a logical step in offering investors access to our best ideas across all of these areas: it provides a new, active all-trend solution for investors looking to benefit from long-term global themes across different industries and market sectors.”
“We identified four trend themes. ‘Digital world’ covers high-growth areas such as e-commerce, digital payments and online entertainment. This trend has expanded hugely over the last five years, with the growth of fintech and mobile e-commerce services presenting opportunities in areas such as payments, social media and sharing.”
“‘Emerging middle class’ focuses on the rapid growth in the world’s ‘new middle classes’ and their spending power in Asia and Latin America, investing in both global luxury goods as well as local brands. ‘Getting old & staying healthy’ invests in companies that provide services to an aging population, such as specialist but affordable healthcare and financial services companies that offer pension products.”
“Finally, ‘Industrial renaissance’ is about the trends behind the fourth industrial revolution, in which innovations such as artificial intelligence and robotics are changing the way we live and work and automation is bringing down costs and enabling smarter and more customized local production. With the move to cloud computing and the roll-out of the Internet of Things presenting security risks as well as opportunities, cybersecurity has been a big growth area within this trend.”
“Our ‘digital world’ trend has been particularly strong for the fund. Our investments in digital payments and targeted advertising platforms have paid off. ‘Getting old & staying healthy’ has been another major theme, where our favoring of genetic testing and precision lab and optical equipment companies has produced great results. The main winners of our ‘industrial renaissance’ trend are all companies which specialize in industrial automation – sensors and imaging systems – and 3D design software.”
“The ‘emerging middle class’ trend has done well from backing the growth of online entertainment and financial services in Asia. Of course, not all our stock picks have worked as well: we had some problems with Asia-focused banks that fell foul of bad loan and compliance matters but, on the whole, our stock picks have produced strong returns.”
“The individual stocks we invest in are backed by strong demographic or technological trends, with most of them positioned to benefit from a combination of these long-term trends. The trends we identify are dynamic in nature and the convergence of two or more trends can be particularly powerful. For example, think of Japan, a wealthy country that has a higher proportion of older people in its population than virtually anywhere else.”
“Beyond the opportunities we see for ‘getting old & staying healthy’ – including specialist healthcare, insurance and wealth management – the scarcity of young workers and low-cost immigrant labor means that companies are increasingly reliant on robotics. This is driving our ‘industrial renaissance’ trend, as well.”
“This theme is also visible in other countries. For example, one consequence of China’s long-term one-child policy is the gradual development of a similar situation in the workforce, driving the top-down need for heavy investment in automation and robotics to sustain growth.”
“Picking individual stocks that can capitalize on trends brings valuation-related risks. As the trend becomes more visible to investors looking for secular growth, the valuations of individual companies can become stretched. For us, valuation is a risk indication – a low valuation in itself isn’t a reason to buy a stock, yet a high valuation usually is a reason not to buy or becomes a reason to sell if we already own it.”
“Another risk relates to how the regulatory environment can change. For example, in some ways companies in social media have become victims of their own success; with users putting more & more of their personal data onto their platform, pressure has grown for legislation over how these companies use and share the data, particularly after it was used for political purposes.”
“In China, internet & mobile gaming are so popular that the authorities have imposed limits on the time players can spend on them in an effort to tackle gaming addiction. Politics and regulation can combine unexpectedly too, as President Xi’s anti-bribery crackdown hit the previously exponential growth of the luxury goods market in China. But, following the blip, the underlying growth trend has since resumed on the back of rising discretionary spending among the swelling emerging middle class.”
“We recognize that although our populations are aging, the limited resources available mean that countries need to keep their healthcare systems affordable. One area that has huge potential in relation to our ‘getting old & staying healthy’ theme is the overlap of artificial intelligence, which isn’t yet being employed efficiently in healthcare, and DNA testing.”
“So we’ve been investing in companies that specialize in data analyses on medical trials and the efficacy on actual patients. On the ‘prevention is better than cure’ theme, DNA testing is gaining ground, with Iceland the first country to take a full DNA-profile of every newborn. Using DNA-databases can identify those at greatest risk of particular conditions; focus can then be on either prevention or early treatment.”
“We were one of the early investors in robotic-assisted surgery and still see massive future growth potential. In the early days, the equipment was dismissed as too expensive, but minimally invasive surgery has since been shown to reduce costs by improving surgical accuracy and to shorten patient recovery time. Procedures are expanding beyond urology and cardiology operations and may soon include lung biopsies, with demand for US-developed robot-assisted surgery equipment now also growing in countries like China and Japan.”
“In the five years up to the end of November 2018, the fund annually rose by 10.71% after costs compared to the reference index's 9.90% gain, so relative performance has been good. Starting from a top-down trends perspective, we try to find growth companies which provide the tools for the new era of digitalization and technology, as we believe they’ll continue to generate strong revenues and cash flows.”
“Although in today’s environment of rising global interest rates and the unwinding of QE, profit margins across the broad market are coming under some pressure, we believe that by investing in companies capitalizing on powerful global trends we can continue to deliver performance for our investors over the long term.”
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