There’s much to be said for investing in companies that are able to tap into future growth areas. Here’s what to look out for if you want to invest in tomorrow’s winners
Throughout history, investors have profited from backing exciting young companies that are able to benefit from future trends.
This is one reason long-term global themes such as technology and the environment are so popular. These areas are packed full of innovative, entrepreneurial businesses.
If you want further proof, consider how the internet and smartphone have revolutionised how we live and work. The world is constantly changing and so are the companies that will be successful, according to Patrick Connolly, a chartered financial planner with Chase de Vere.
“WhatsApp gained more followers in its first six years than Christianity did in 19 centuries,” he says. “Investors cannot afford to sit still.”
In his opinion, investors should gain exposure to today’s winners, such as Apple, as well as keeping one eye fixed on the next generation. However, he acknowledges this can be tricky.
“It’s easy to recognise potential trends, but benefiting from them is more difficult,” he says.
“You must focus on long-term structural changes rather than ‘flavour of the month’ ideas.”
Mr Connolly also warns investors to be wary of funds that are focused solely on a particular theme, as they may experience a rocky ride.
“They tend to have all their eggs in one basket, so can be volatile,” he says. “While they could potentially produce spectacular returns, they could also be subject to major losses.”
Rise of robotics
Tom Riley, manager of the Axa WF Framlington Robotech fund, buys companies he believes would benefit from future trends, such as the growth of robotics and automation.
“Our research teams have identified five multi-decade, global, core themes that we think will drive and define the way businesses operate in the future,” he explains.
Alongside automation, these so-called ‘evolving economy’ themes include the connected consumer, ageing and lifestyle, clean tech, and transitioning societies.
“New technologies allow significant growth potential for robotics, such as semiconductor testing, manufacturing, assembly, food and beverage, and healthcare,” he says.
Simon Edelsten, manager of Mid Wynd International Investment Trust, notes that many companies in the robotics field, not just robot manufacturers, are beneficiaries of the theme. “Many of them have risen in price quite dramatically in the past 12 months,” he says. “Sometimes there’s better value to be found in the shares of their key parts suppliers.”
Quick guide: Is this approach right for me?
Consider investing in future trends if…
- You want exposure to interesting developments
- You want to invest for the longer term
- You are looking to diversify your portfolio
Themes don’t always need to be ground-breaking new developments. They can be in established areas that are expected to enjoy strong demand. For example, affordable healthcare is being driven by an ageing population and the financial strains on healthcare systems around the world.
Focus on long-term structural change, not ‘flavour of the month’ ideas
“There is growing demand for cheaper, more effective ways of delivering diagnosis, treatment and care,” says Mr Edelsten. “We are still able to find stocks at sensible valuations.”
Sustainable and ethical investing represents another area of interest.
“It has been led by the big pension funds in Europe and Japan, and is now becoming much more mainstream,” says Peter Sleep, a senior manager at Seven Investment Management.
The approach includes everything from eliminating companies involved in weapons to scoring them on emissions, corporate governance and gender diversity.
Thematic tilts
There is also something to be said for smaller companies with global customer bases, says James Yardley, senior research analyst at Chelsea Financial Services.
“Since the Brexit vote, the average UK small-cap fund is 18% ahead of its larger peers. I doubt many people would have expected this two years ago,” he says.
Small caps are often under-researched, providing active managers with the potential to add value. “For those who can stomach the extra risk and are investing for the long term, we like small cap funds,” he adds.
Investing in the future is not a guaranteed route to riches, according to Adrian Lowcock, head of personal investing at DIY investment provider Willis Owen. Sometimes themes just fizzle out. “Thematic investing sounds great and it’s easy to understand big concepts, but it can be much harder to predict what the outcomes may be,” he says.
For example, it can be hard to pinpoint where the opportunity is within a theme. Mr Lowcock suggests 3D printing falls into this category.
“It hasn’t generated the anticipated returns. As is often the case, it isn’t the invention itself that makes the money, but the company using it effectively,” he explains.
There are numerous ways to get exposure to themes: you can buy individual stocks, a specialist fund, or gain a thematic exposure via a fund group’s overall approach.
“Some groups put more emphasis on the themes and trends that they believe are going to influence markets and investors over the next few decades,” he explains.
For investors targeting a particular theme, such as robotics, Mr Lowcock suggests an allocation of only 1% to 2%, with up to 10% in a broad thematic fund. He adds that a thematic overlay can complement a focus on value, growth or income.
“I don’t like putting all my eggs in one strategy or approach, so would suggest no more than 25% of the overall equity element,” he adds.
Fund to watch: Newton Global Income
This fund invests in a cross-section of areas that are tipped to benefit from strong demand over the coming years.
Central to the portfolio’s philosophy – and one that helps guide stock selection – is Newton’s distinctive global thematic investment approach.
Companies that operate in exciting sectors such as technology, media and software feature in the fund’s top 10 positions. These include technology firms Cisco Systems (5.6%), CA Inc (3.5%) and Infosys (2.6%), beverage company Diageo (3.3%) and fashion brand Ralph Lauren (3%).
Adrian Lowcock, head of personal investing at DIY investment provider Willis Owen, likes the fund’s concentrated approach and its focus on buying companies with good fundamentals.
Newton Global Income’s manager Nick Clay (pictured) seeks to identify companies with strong management teams, a decent financial outlook and attractive valuations, based on dividend yield, cash flow and return on capital.
“Newton takes a thematic view, looking for big trends throughout the world, and then selects stocks which it believes will benefit from these themes,” Mr Lowcock adds.
Value of £100 invested in the fund over five years
| Year | 2013 | 2014 | 2015 | 2016 | 2017* |
|---|---|---|---|---|---|
| Fund percentage movement in year (%) | 15.15 | 9.12 | 10 | 29.55 | 6.65 |
| Value of £100 ** (£) | 105.55 | 125.65 | 138.21 | 179.05 | 206.61 |
* Year to date to 3rd September, 2018 **The £100 was invested on January 1, 2013. Source: Moneywise.co.uk
| Manager | Nick Clay |
| Launch date | 30 November 2005 |
| Total fund size | £5.6 billion |
| Minimum initial investment | £1000 (£250 subsequent min) |
| Maximum initial charge | 0% |
| Annual management charge | 0.85% |
| Ongoing charge | 0.95% |
| Performance fee | None |
| Contact details for retail investors | 0800 614 330; clientservices@bnymellon.com |
Rob Griffin writes for the Independent, Sunday Telegraph and Daily Express
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