Reliable guidance for investors tracking the themes to come

In the Hollywood film The Big Short, the character played by Christian Bale is based on the real-life investor Michael Burry, who identified flaws in the economic model of the US housing market and bet it would end in a “bubble”.

As we all now know, he was indeed right, and when the bubble burst it sparked the 2009 global financial crisis. Mr Burry made millions out of the collapse, as the film vividly explains.

Alexandre Mouthon of the Swiss bank Pictet is not a perfect simile for Mr Burry. He does not lounge around the bank’s Geneva offices in sports gear, for example. But he is an advocate of the trend of “thematic investment” that The Big Short highlighted.

“The theory is simple: to identify long-term mega-trends and then invest in companies that will benefit from them,” he says.

Mr Mouthon has been doing this for Pictet for four years now. It must be stressed that he is not seeking to benefit from another global financial crisis, nor is he predicting one. But he does believe thematic investment is the next big thing in global financial markets.

Pictet obviously agrees. It has been promoting the thematic concept for some time and hired Mr Mouthon to head up the 30-strong Geneva-based team that manages $26 billion of thematic assets. He also shares another characteristic with Mr Burry – water. The US investor used some of his gains after 2009 to invest in the water industry, which he identified as a long-term investment theme for decades to come.

Likewise Pictet and Mr Mouthon. Water was the first big theme Pictet spotted back in 2000, and it has been one of its best performers, showing a 180 per cent increase since then, easily outperforming the MSCI sector index.

It is also a subject close to the heart of policymakers and financiers in the arid Middle East. Mr Mouthon explains: “There are huge investments around the world in water. In the US and Europe in infrastructure and water treatment, but also massively in Asia and the Middle East. It raises so many issues – pollution, water treatment, desalination, security of supply and infrastructure.

“It is a sector that is run by utilities that are usually government-regulated, so we will invest in the public-private partnership vehicles, and in those companies which are investible as public equity. We also invest in those companies that provide technology and innovation for the water industry,” he says.

The funds are actively managed by the Pictet thematic team. “These people have specific expertise in their fields and bring that to bear in the investment strategy,” he says.

Water is one of nine “themes” into which Pictet puts investment funds. Mr Mouthon contrasts the thematic approach with the conventional sectoral view of investment.

“We will invest across several sectors as long as it meets our thematic criteria. For example, our digital theme can include investment in information technology, utilities and electronics,” he says.

The rule is that, to qualify as a “theme” investment, an equity has to derive at least 20 per cent of its revenue from the themed activity. So for example, many food companies make water products, but will generally account for less than 20 per cent. So they would not quality as water-themed investment.

Another big theme is security, which is also much in demand in the Middle East and North Africa. This was launched in 2006 and has also bettered the indexes by a substantial margin. “We look at security in three segments: physical security, security services and IT security.

“Our definitions are quite broad, so in physical security there will be transport and safety companies, right down to safety equipment manufacturers, like seat belt companies. Security services includes testing and inspection businesses, while IT security is essentially cybersecurity companies.” Mr Mouthon says.

The newest theme is robotics, which Pictet opened last year in a US$1.2 billion fund.

“It was a pioneer launch for Europe, as far as we’re concerned. Robotics has reached a tipping point in investment terms. Technology innovations have made robotic applications more affordable and practical. The price of robots has come down 30 per cent, but their performance has improved 300 per cent.

“Companies that couldn’t afford automation in the past are now actively looking at it. We see 10 per cent annual growth in the robotics market over the next decade,” he says.

The other big themes in the Mr Mouthon’s portfolio are timber, agriculture, clean energy, health and premium brands. All have performed well, outpacing the MSCI indexes, although he stresses that none of the funds are benchmarked against other indexes.

So what are the next big themes of the future? Pictet has an alliance with the Copenhagen Institute for Future Studies, an organisation of academic futurists whose job is purely to look into their crystal balls to identify the trends that will determine how we, and business, will shape up over the coming decades.

“There are 14 mega-trends which we have identify along with Copenhagen. Many of them are to do with demographic development. For example, they have calculated that by the year 2050, two-thirds of the world’s population will live in cities, so any investment funds on the urbanisation theme would seem to make sense. This will have a big impact on the thematic portfolio,” Mr Mouthon says.

Also taking up a lot of his time is the theme of population ageing. Again by 2050, the proportion of people over 60 years old will double as a world aggregate figure, which has big implications for health care, biotechnology and pharmaceuticals industries.

The development of technology is also a big theme. “This seems to be unstoppable. Since the 1950s the expansion of technological capability has been probably the biggest single factor that has shaped human life, and this will continue,” he says.

These are global themes, of course, so geographical investment considerations will be increasingly irrelevant.

“They are almost universal themes that will affect all of us equally. But there might be some geographical bias. For example, in the digital, security and robotics themes, there might still be a bias towards America, because that is the most advanced country technologically. But for how long that will last is difficult to say.”

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Frank Kane

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