How to invest in the megatrends changing our world

Investing based on a specific theme has been a part of the investment world for quite some time. However, the demand for funds that aim to capitalize on significant global trends has grown significantly in the past few years.

In basic terms, thematic investing is a tactic that recognizes disruptions happening in established markets and industries, such as artificial intelligence or electric vehicles.

There has been a significant amount of investor attention towards sustainable and climate-related topics as a result of the substantial investments being made to address this pressing global crisis.

Numerous financiers hold the belief that these concepts possess the capability to produce exceptional market gains in the times to come.

Predicting the future: Thematic investing involves investors spotting worldwide patterns that have the ability to disturb established sectors and generate profits for them.

Certain companies, such as Newton Investment Management and Pictet, have wholeheartedly adopted thematic investing as a fundamental aspect of their strategy.

In the previous year, Charles Schwab also introduced thematic stock compilations for individuals who wish to invest in businesses that resonate with their own passions and principles.

According to Jason Hollands, who holds a position as a director at Bestinvest, the key focus is on recognizing significant patterns or trends, often known as megatrends, in both society and the economy. These trends are expected to unfold over the next few years, and the goal is to identify companies that are likely to profit from them.

It's understandable to wonder if thematic investing is simply sector investing in disguise.

Although BlackRock, an investment firm, believes that thematic funds and sector funds are distinct in nature.

According to a representative from BlackRock, themes are centered on long-lasting changes in the economy, either through growth or disruption, aiming to seize the opportunity created by a significant and enduring shift.

However, industries are subject to cycles and tend to be influenced by short to medium-term beliefs regarding the economic pattern.

Investing in themes can be justified due to the possibility of targeting clusters of innovative companies that are expected to significantly expand their presence in the global stock markets in the foreseeable future.

Hollands also mentions: 'When you embrace a thematic mentality, it can make the journey of investing quite thrilling because instead of solely concentrating on the technical aspects of gains, appraisals, and shareholder payments, you are pondering over the significant aspects of the overall scenario.'

Limits Of Theme Investing

When you choose thematic investing as a strategy, essentially you are attempting to envision the potential future of the world by gazing into a metaphorical crystal ball.

But this poses challenges since the future is uncertain, and the world doesn't always progress in the anticipated direction.

Hollands states: 'Just a short while back, people believed that the conclusion of the Cold War would bring about a period of peace benefits and that the growth of globalisation was unstoppable.'

Currently, there is an ongoing conflict in Europe involving Russia, a decline in the relationship between the western countries and China, and the era of strong global connectivity has peaked, leading to greater focus on safeguarding supply chains.

Certain investment trends may eventually lose popularity and fade away.

According to Kenneth Lamont, a prominent analyst at Morningstar, there is a possibility that the idea may not unfold as expected.

There are certain topics, like 3D printing, that have the potential to greatly impact our lives. However, these developments haven't unfolded as dramatically as we initially anticipated. If we took everything we read in the news at face value, we would probably be eagerly anticipating the ability to create McDonald's burgers in the comfort of our own homes.

When a prominent concept starts gaining attention, it can occasionally lead to a swarm of investors rushing to put their money into it, and artificial intelligence (AI) is a prime illustration of this phenomenon at present.

Hollands cautions: 'In certain instances, thematic investors may find themselves vulnerable to investment bubbles, where excessive excitement regarding a certain theme pushes up the value of investments to dangerous heights, eventually resulting in a sudden collapse. Although this doesn't happen all the time, it is crucial to exercise caution.'

Investors should also be cautious about "themewashing" when it comes to investing based on themes.

At times, thematic funds can be overtaken by prominent tech giants that have minimal involvement across multiple themes.

Lamont expresses that this situation brings up legitimate worries concerning themewashing. Investors must not purely be dazzled by a powerful storyline, but should genuinely comprehend if the fund provides sufficient opportunity to engage with the intended theme.

AI megatrend: Investors face the possibility of getting caught up in significant trend bubbles that have the potential to suddenly deflate.

Future's Dominant 'megatrends'?

Megatrends are the underlying concepts that investors recognize as having the highest potential to bring about significant and widespread transformations worldwide.

These could involve the impact of an increasingly older population on changing consumer habits or the rise in population size necessitating a more sustainable utilization of resources.

Bestinvest recognized changing demographics as a major trend. Hollands explains: 'The worldwide population has increased by 80 percent in the past four decades, thanks in part to higher life expectancy. However, these patterns vary greatly among different countries.

As an illustration, let's consider Japan where the average age stands at 48.6 years, and we observe a decline in population. A similar situation is anticipated in China due to the consequences of their ill-fated "one child" per household policy.

Nations grappling with a rise in elderly citizens encounter economic obstacles, yet there are lucrative prospects to explore. These prospects encompass the need for better healthcare services, an increased reliance on automation to combat labor shortages, and a surging demand for leisure activities to cater to the expanding population of retirees.

The shift towards a more environmentally friendly economy and stepping away from using fossil fuels is a significant and ongoing trend. This movement towards achieving 'Net Zero' emissions is having a profound impact on the need for various resources essential for clean energy infrastructure and electric vehicles, including but not limited to copper, nickel, lithium, cobalt, graphite, and rare earth metals.

Which Funds To Invest In?

Aubrey Global Emerging Market Opportunities is a fund that specifically hones in on the concept of the increasing strength of consumers in emerging markets and their desire for various products and services.

Holland states that the emergence of ETFs has made it easier to focus on particular topics, such as Artificial Intelligence (Legal & General Artificial Intelligence UCITS ETF), automation and robotics (iShares Automation & Robotics UCITS ETF), and the demand for metals that are crucial for upcoming technologies like electric vehicles and smartphones (Global X Lithium & Battery Tech ETF).

Fidelity's primary thematic fund is Global Thematic Opportunities, which allocates investments towards a variety of themes such as worldwide population trends, advancements in technology, the healthcare sector, environmentally-friendly solutions for climate change, and renewable energy.

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