1st December 2015
Darius McDermott, Managing Director
You'd think it would be simple, wouldn't you? Identify a long-term trend, invest your money in a company (or companies) that is playing this theme, and sit back and wait for the next 30 years or so. Unfortunately, that's not the case.
A trend, by definition, is a movement in a general direction. The journey, especially if long, can take many different twists and turns and different people will take different routes to get to the same end point. In the same way, how you invest in a theme can change dramatically over time.
Take technology as an example. Technological advances are constantly changing the way we live our lives. It is a very entrepreneurial and exciting sector and, as a result of the rapid advances, it has changed considerably even in the past five years, let alone the past 30.
In the 1980s, Silicon Valley was the place to be and technology first started to became personal and portable, with PCs, mobile phones, Walkmans and videocassette players in the home. Even the most popular films in the cinema were all about our expectations of how technology would transform our lives in the future. Things don't look quite as predicted in Back to the Future, although they seemed to get more right than wrong with tablet computers, hands-free gaming, wearable technology and video calls, but certainly we've moved on and the companies that are thriving have changed too. Today we've mobile banking, data storage and 3D printing. So you have to move with the times.
Valuations are mixed at the moment, but there are still opportunities to be found. 'Security' stocks are particularly interesting. They aren't cheap, but they have the growth potential to justify the price being paid and it is an area where company IT spend is actually increasing.
Sometimes, a long-term theme is identified, but takes many years to start to come to fruition. Take demographics, or more specifically, the ageing population, for example. The healthcare sector should be a major beneficiary of this but actually had a 'lost decade' at the turn of the millennium. Nothing really happened. Then, boom, it took a global financial crisis and austerity to help it burst out of its trading range. The past five years have seen tremendous advances in the sector and investors have been well rewarded.
Pensions aside, healthcare is our biggest problem today. Healthcare spend in the US is now 17.5% of GDP. In Europe it is 8%-12%. In the UK we spend £110 billion on healthcare, 75% of which is on chronic diseases. It's too much and the system is creaking. We have 20th century infrastructure trying to cope with 21st century problems. So companies that can reduce costs and increase productivity, especially for governments, are now thriving.
Healthcare consumerism is also growing: we are starting to take control of our primary care and more and more people are willing to pay for faster, better service. For example, a vial of flu vaccine in the UK costs about £5. By the time you've booked an appointment, sat in a doctor's waiting room and seen a nurse for the jab, it costs the NHS about £25. In the US, companies like CVS (similar to Boots in the UK) do walk-in flu jabs that cost you $20. Healthcare insurance in the US really only covers the big expenditures, as you pay the first $4-5,000 yourself (the equivalent of 'excess' on insurance here). A standard doctor's appointment is between $100-200, so you can see why a $20 flu jab is so appealing.
If you like thematic investing, Elite Rated funds which play to the subjects in this article include AXA Framlington Global Technology, Polar Capital Global Healthcare Opportunities and Liontrust Macro UK Equity Income. The latter is in a popular sector but does something different, investing in a number of long-term themes. The core philosophy of the fund is that macro-thematic analysis and the identification of economic, political and social developments are key to outperformance. The fund focuses on major factors affecting the world, such as global warming, globalisation and ageing populations. They also focus on negative themes to avoid certain sectors. As a result, they don’t own any incumbent banks, utility or tobacco companies.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius' views are his own and do not constitute financial advice.
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