What opportunities exist for plan sponsors in thematic investing?

The most powerful and durable investment themes are those where ingenuity sparks innovation to address imbalances in the world, said David Docherty, investment director for thematics at Schroders, when speaking at the Canadian Investment Review’s Investment Innovation Conference in November.

He pointed to imbalance between population and resources as an example, and themes related to climate change, the energy transition, disruption, health care innovation, changing lifestyles, cities and sustainable growth.

Even within these themes are different sub-themes, he added. “There’s a lot of opportunity within individual themes and that would give the investor the ability to navigate their way through themes over the longer term.”

Institutional investors can select themes that are durable by looking at the history of the future, Docherty said. “As counterintuitive as it might seem, looking back at the past, understanding the history of the future, we think is absolutely critical to identifying themes going forward.”

When looking to the past, the basic need for convenience has always mattered and will continue to matter going forward, he said, noting the same is true for the need for efficiency and productivity. “The Romans invented a smart material. . . . That smart material actually was volcanic ash, which was used to be put into the Pantheon many years ago and that has made the concrete stay dry. Today, Oslo Airport was rebuilt very recently using volcanic ash in the concrete.”

Other examples of themes that have mattered in the past are entertainment and survival, he added. “Health care has been a concern ever since humankind arrived. And even things like climate change, which might seem like a modern problem, is driven by that very existential factor of the desire to survive. So we think that by looking back at the history of the future, that can guide us into the coming years.”

However, a key difference between history and the present is the rise of technology. Further, innovation and disruption are inextricably linked, he said. “Innovation brings about disruption and then disruption brings about innovation.”

From a practical perspective, investors who want to access companies that deliver innovation before others in the market notice can use technology to do so, Docherty said. “By using machine learning techniques, for example, investors can look through . . . patent information and discover where ingenuity is, potentially before others in the stock market have spotted it.”

And at times, innovation can come from places where it’s least expected. Further, it’s imperative to have a long-term view when looking at themes. “They need to be structural rather than cyclical. Persistent, not faddy. And they also need to be global and unconstrainted. If these themes are as important as we believe them to be, they can’t be constrained by index weightings for stocks, sectors or even regions.”

Investors also require discipline, Docherty added, noting investment universes can’t be too narrow because that will take away flexibility that investors need, but they also can’t be too broad because it takes away precision. And, valuation rigour is key: “Yes, we want to identify themes. Then we need to identify the companies. But, of course, they need to be valued attractively in order to make positive returns.”