Thematic equities investing sounds great in theory but can be hard to do via ASX. This market’s limited exposure to a number of megatrends forces Australian investors to invest in global stocks or through specialist active or passive funds. Think cloud-computing, the internet of things, pharmaceuticals, driverless cars, growth in middle-class Asian consumption and renewables. Stocks exposed to these trends are represented on ASX to varying degrees, but the main action is almost always overseas.
This is an important issue for Self-Managed Superannuation Funds (SMSF), particularly those in the accumulation phase that are more focused on capital growth than income. They should seek exposure to powerful investment themes that will run for years or decades.
I know too many SMSF trustees whose portfolios are filled with “cocktail stocks” – interesting ideas recommended by people they know, but now present a mishmash of investments. Stocks that were more about short-term gains than building serious long-term wealth.
There’s not enough commentary on basing the equities component of SMSF around long-term themes and taking a global approach. All too often, it’s about random stock picking or, at the other end, tactical asset-allocation strategies that are beyond many SMSF trustees.
Thematic investing can be extremely rewarding. Consider investors who bought companies exposed to an ageing global population a decade ago. Or those who plumped for infrastructure companies five years ago. Or those who positioned portfolios to capitalise on global technology leaders, such as Apple, Microsoft, Alphabet Inc and Facebook.
Or investors who positioned portfolios to capitalise on the coming booms in internet of things companies (semiconductor stocks, for example) or self-driving vehicles. Growth in middle-class consumption in emerging markets could be the biggest trend of them all.
This is a different style of investing for SMSF. Rather than build portfolios on traditional asset-allocation strategies, or build an equities component around sharemarket sector allocations, the SMSF trustee focuses on a handful of megatrends and finds ways to gain exposure.
I’m not suggesting all investors adopt this approach or that they do so without financial advice. Megatrends are often overhyped and overvalued, at least at the start, and some trends destroy wealth. Nor should thematic investing be the sole focus of SMSFs or replace more traditional asset-allocation approaches or the use of managers who better understand these trends and the best-value stocks within them.
But in many cases, building the growth component of portfolios around global megatrends is a better bet for investors with a multi-decade investment horizon than taking bets on individual Australian stocks and actively trading them. Leave that to professional fund managers who are better placed to get in and out of the market as value dictates.
A growing number of ASX-quoted global sector ETFs and Listed Investment Companies are providing opportunities for SMSF trustees in thematic investing. Here are three ideas.
1. Global infrastructure
I like the long-term prospects for global infrastructure with an estimated US$57 trillion to be invested in that asset class by 2030, according to McKinsey & Co forecasts. The AMP Capital Global Securities Fund, an active ETF that joined ASX in June, is an interesting way to play that trend. Unlike passive ETFs, active ETFs aim to outperform their benchmark.
Investors who want more traditional active exposure to global infrastructure via ASX could choose the new Argo Global Listed Infrastructure Fund. The LIC uses US-based Cohen & Steers Capital Management to manage its global infrastructure investment portfolio.
Chart 1: Argo Global Listed Infrastructure FundSource: The Bull
As an aside, why doesn’t a manger launch an ETF over an index of unlisted infrastructure in Australia and overseas? That would be seriously interesting.
2. Healthcare Few sectors have better long-term prospects as the population ages. By 2050, people aged 60 or over will exceed the number of children for the first time, the United Nations predicts. The world’s older population will more than double to two billion, nearly eight in 10 will live in emerging economies, and almost 400 million will be aged 80 or over.
Rising demand for healthcare products and services – and rising healthcare company earnings – over the next decade is inevitable. A global approach to healthcare investing is vital: offshore healthcare companies are often cheaper than their Australian peers. Think medical-device giant Medtronics Inc versus Cochlear or Resmed in Australia.
The iShares Global Healthcare ETF or Betashares Global Healthcare ETF provide useful exposure to the trend. The BetaShares ETF is hedged, meaning it eliminates currency risks and provides purer exposure to a basket of global healthcare stocks.
Chart 2: iShares Global Healthcare ETFSource: The Bull
The BetaShares Global Cybersecurity ETF is among the more interesting index investments launched this year, and hopefully a harbinger of things to come as issuers launch ETFs that help solve the global thematic investing puzzle referred to earlier in this column.
The ETF aims to replicate the price and yield performance of the Nasdaq Consumer Technology Association Cybersecurity Index, before fees and expenses. Its top-10 stock holdings include mostly US technology giants that are protecting corporates and governments against cybercriminals.
Cybersecurity will surely become a bigger issue in the next 10 years as wars are fought online and espionage via computer hacking grows. This trend is well known and most of the stocks on which the ETF is based are valued accordingly.
But increasing exposure to a diversified portfolio of the world’s best cybersecurity companies looks like a good move for SMSFs with a multi-year focus.
Chart 3: BetaShares Global Cybersecurity ETFSource: The Bull
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness and accuracy of the information, with regard to your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Oct 19 2016.