What is thematic investing? What are the five megatrends to look out for? How do experts envision the future? Jiazhi Chen-Seiler, Head of Julius Baer's Next Generation Investing Team, explains.
Jiazhi was visiting world-renowned contemporary artist, Marcel van Eeden, at his latest exhibition at the Barbara Seiler Gallery in Zurich, when we caught up with her. “I have always been a big admirer of contemporary art. I like the way it challenges the norm and shapes our understanding of this globally interconnected, geographically diverse, culturally eclectic, and technologically advanced world.”
Challenging the status quo
For Jiazhi, going to an exhibition is a way to disconnect from the number-driven task of leading a team of fund and portfolio managers at a global bank. That said, the two worlds are not as different as they might seem.
“Thematic investing, surprisingly, has similarities with contemporary art,” explains Jiazhi . “Both approaches break away from traditional concepts – conceptual artists reject the purely aesthetical approach towards art and we challenge the traditional country and sector classification in creating opportunity sets. Instead, we look for structurally growing industries and companies, and group them according to the common denominators, or ‘themes’, they represent.”
Global forces profoundly changing our present and future
A thematic analysis of the world requires a mind that is open to the myriad possibilities and endless constellations of the way information can come together to form patterns and give way to ideas and themes.
This way of investing is by no means new. Going back to the early 2000s, it has come a long way and endless investment themes have sprouted in the meantime from every possible social, economic, demographic or technological angle – like digital security, sharing economy, millennials etc.
“We examine our world with the goal of finding similarities between seemingly independent data points and we then bring them together around central concepts.”
So what is significant about Julius Baer’s approach?
Jiazhi Chen Seiler: There are a couple of things. Our team has a research and investment background and this allowed us to have an interdisciplinary approach right from the beginning. In fact, Julius Baer was one of the very first banks to do thematic research at the time. We built a proprietary tool to rank industries and companies according to our philosophy.
When was that?
Back in 2010. It started out as a purely research-driven exercise. We were the first ones to identify the “Silk Road”, orphan drugs for rare diseases, digital health, and education, amongst others, as key globally relevant trends. We began publishing our findings in white papers and presenting them to our clients at our Next Generation Dialogues.
Did the research papers trigger any reaction from clients?
Yes, indeed. More and more clients started saying to us “OK, I read your paper, but how can I invest in that theme?” That is when the investment side took over. We first designed various passive products for different investment themes. Some of them went on to win industry awards. Eventually, we grouped various stand-alone themes into what we considered ‘five key global megatrends’ –for example, macroeconomic, geopolitical, and technological forces that were profoundly changing our world and shaping our future at an unprecedented pace. We then launched actively managed strategies based on this cross-thematic approach.
What are these five megatrends according to Julius Baer?
The five key structural growth themes that we have identified and have chosen to invest in are Arising Asia, Digital Disruption, Energy Transition, Feeding The World, and Shifting Lifestyles.
Can you explain why you decided to focus on these?
For us, it comes down to numbers. Over the last ten years, the middle class in Asia has tripled from 500 million to about 1.5 billion, and is expected to increase to over 3 billion by 2030. What that means is that in a decade or so Asia will have the most dynamic middle-class consumer segment. How does that translate into investment opportunities? Well, think travel, think cosmetics, beauty and wellness, and new consumer trends in any area that contributes to upward social mobility. We look at companies who foresee this and develop goods and services in the premium consumer segment.
Digital disruption must be a likely candidate for thematic investors. How is your approach different?
Digitalisation is indeed a key focus area, with great opportunities as well as high risks. Consumers benefit from the constant change but for investors the risk of failing is very real. So many companies come and go, creating huge hypes and then disappearing into oblivion. You might win it all or lose it all. For example, we don’t invest in robotics at the moment, because we believe that they are affected by the negative growth prospects of the car industry. This means that robotics are currently overpriced. But we like cloud computing, which is expected to grow to over USD 600 billion by 2023.
You have a high-conviction approach; can you tell us why?
We avoid hypes like the plague and only buy into companies when they enter their most productive phase – which is typically either the ‘high innovation’ or ‘consolidation’ phase. Our Motto is ‘never stop learning’. We constantly analyse every shift in the investment universe, in order to connect them to the big picture and consider both the upside and the downside they represent. One of the digital payment companies we included in our portfolio was bought right afterwards by an industry leader – and needless to say, this helped us deliver outperformance.
This is where our clients benefit from having a top-down and bottom-up approach, combined with a high-conviction investment style.
Having an open mind and an eye for patterns is something that artists and thematic investors have in common. We leave Jiazhi to her discussion with Marcel van Eeden about paradigm shifts currently taking place in the art world, before she turns her attention back to analysing the seismic shifts affecting our world.