investment insights
rethink investments. Our new thematic approach
Key takeaways
- Fundamental transformations in society, (geo)politics, technology and the global economy offer new opportunities for long-term equity investors
- We have identified six high conviction investment themes, spanning technology, demographic change (longevity and generational change), infrastructure, and the transition to a net-zero, nature-positive economic model. They are all rooted in rigorous research of structural trends and proprietary bottom-up analysis
- By adding these exposures to multi-asset portfolios, we seek to exploit drivers of long-term outperformance, improve diversification, and transcend business cycles and investment regimes
- These investment themes express our convictions in structural transformations through a range of portfolio implementation solutions, and are an integral part of our House View.
rethink everything® is a lens we apply to every aspect of the global economy, technology, demography, politics and finance in the ongoing transition to a net-zero carbon and nature-positive future. As governments, consumers and businesses adapt to the shifts needed, we are aligning portfolios to benefit. rethink investments maps our convictions in these fundamental transitions onto thematic equity exposures.
Each week we examine the most significant macroeconomic developments and their portfolio implications. This week, we take a longer view of some of the deeper structural shifts that we believe need to be reflected in investment decisions and outline our new thematic framework, which is part of our House View.
The case for thematic investments
Asset managers have traditionally sliced the equity market into regions, sectors or styles to beat passive, market-index-following investment strategies. This may work for a 12-month investment horizon but can prove insufficient for long-term outperformance. 2023 was a case in point as the worst year for stock picking in two decades: only 29% of companies in the S&P 500 managed to outperform the index compared to an average of 47%. Adding a thematic angle to multi-asset portfolios can improve their resilience through business cycles, and can allow them to benefit from targeted regional, sector or style exposures. Our rethink investments framework builds on six research-originated, high-conviction investment themes:
- rethink longevity.
- rethink new gen.
- rethink technology.
- rethink net zero.
- rethink nature.
- rethink infrastructure.
These themes use our analysis of demographics, technological breakthroughs, and the transition towards the CLIC® (circular, lean, inclusive and clean) economy. They are all long-term shifts impacting human activities over decades and can be regarded as secular transformations. They have powerful catalysts and disrupt many sectors, creating new business models, value chains, winners and losers.
While these themes have multi-asset implications, their most direct implementation in portfolios is through listed equities. With the exception of rethink nature, a more nascent investment theme, our thematic equity selections identify between 20 and 40 ‘buy’-rated (or in some select cases ‘hold’-rated stocks) per theme from our investable universe. The degree of their exposure to underlying themes, or their ‘materiality’, is rigorously analysed either via traditional sales metrics, percentage of research and development (R&D), or capital expenditure, market share or future sales growth. The fundamental qualities of the companies, including their business model, pricing power, innovation, balance sheet, cash flow generation, management team, and sustainability metrics, then lead us to select those that we believe are best positioned to benefit from material exposure to our investment themes.
rethink longevity.
Life expectancies have risen radically in the last 70 years, promising a new era of healthy, older living. Healthcare, financial and consumer companies are at the heart of the challenges and opportunities that increased longevity brings. Healthy ageing is creating tailwinds for consumption, leisure and tourism services. Connected medical devices support a shift towards longer independent living. Simultaneously, promising age-related disease treatments may unlock a rising share of healthcare spending. China has put in place ambitious government policies to facilitate access of its population to innovative treatments, offering new opportunities. Meanwhile, financial services will see more demand for savings solutions, benefiting insurers, wealth and asset managers.
rethink new gen.
Alongside rising longevity, a new age group is changing global spending power. An increasingly middle-class, digitally native, experience-led, convenience-oriented, and lifestyle-and-climate-sensitive ‘New Gen’ cohort is overwhelmingly based in emerging markets. Some technology, telecoms, sportswear, luxury, and beauty companies stand to benefit. New healthcare challenges are also creating new markets, including for wearable devices that measure and analyse personal data. The rethink new gen investment theme captures opportunities from this range of consumer habits and influences.
rethink technology.
The widespread roll-out of artificial intelligence (AI) to the services sector is creating a new technological revolution. This is equivalent to the industrialisation of the last two centuries and is driving structural demand for semiconductors and data centres. AI’s applications are improving R&D and product design, supporting factory and home automation, making health services cheaper and more precise, while improving customer experiences. From the technology sector to a range of industries from finance to retail, companies in the AI value chain are set to benefit.
rethink net zero.
Limiting climate change requires the transition to a net-zero economy. Shifts in energy, materials, and agriculture are key, and firms leading such changes to energy generation and clean transportation should benefit. This theme also explores developments in raw material demand, as well as companies employing circular production processes, recycled and alternative construction materials. More efficient food chains, including dietary changes and technological advances in agriculture, will emerge. We also highlight the ‘enabling services’ behind key system changes, including more efficient production processes and shared mobility.
rethink nature.
Climate change, biodiversity loss, land degradation and more frequent pandemics are all symptomatic of an economic system at odds with the natural environment. Natural assets and services tend to be deeply undervalued or ignored. The rethink nature theme crystallises how listed companies leverage nature’s regenerative power, or support its preservation through pollution control, waste management, and sustainable resource management. The theme offers a way to unlock value from the net-zero transition to a nature-positive economy. We highlight firms active in regenerative forestry, organic fertilisers, biofuels, sustainable packaging, and innovative recycling. We expect this theme’s opportunities to grow over time as more private companies seek access to public markets and a broader investor base.
rethink infrastructure.
The transition to a nature-positive, technology-embedded economy demands an overhaul of the world’s infrastructure. While governments and institutions can catalyse projects, the limits of public finances leave an important role for the private sector and private investors in transforming power, transport, water, and communication infrastructures worldwide. In listed equities, we seek attractive growth opportunities in industrial, utilities and energy companies which are participating directly in the infrastructure boom.
Managing portfolio risk exposures
An individual theme’s stock selections are inevitably different from any reference index’s constituents. For example, our rethink technology theme is more exposed to the tech, financials and communication sectors; rethink net zero is more exposed to industrials, materials and consumer discretionary. Each theme’s risk exposure to the wider market therefore varies; more defensive themes, such as rethink longevity and rethink nature, should be less volatile than growth-tilted themes such as rethink technology. Much therefore depends on an investor’s conviction in a theme, and sometimes their investment horizon. We believe that investing across all six themes in a measured and risk-controlled way, can provide greater portfolio diversification in different market environments, while still offering concentrated sources of return.
Our new thematic approach offers access to these high-conviction investment opportunities through a range of solutions, to suit investors’ needs and preferences. We do this via investments in individual listed stocks, fund solutions or derivative investment instruments employing yield-enhancing, capital-protecting or leverage strategies for eligible investors. We will present detailed research and analysis from our equity and sustainability experts on these six themes in a new White Paper next week.
Important information
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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