Has COVID-19 made thematic investing essential to investors?

Expert: David Docherty, Investment Director, Thematics Schroders Plc

Facilitator: Brod Whiting, JoyndUp Ltd

Introduction

David provided us with an in-depth insight into the concept of Thematic investing at the beginning of his presentation. The key element he states is to find themes that are durable and sustainable. The themes that are most powerful are where human ingenuity ignites innovation to address imbalance in the world. Imbalances might be between population and resources. Climate change is an example of that where the response by humanity is to execute the energy transition.

Another example of imbalance is between supply and demand in individual industries, unmet demand and inefficient supply. Uber came into the taxi business and transformed it in a similar way Netflix has now done the same to the entertainment industry.

The topic and the discussion

In terms of thematic investing during these troubled times Healthcare Innovation is a big theme. There are big population and resource imbalances. At a supply level most countries would admit the delivery of healthcare is very challenging. David told us of stats he had seen where 30% of healthcare spending was wasted on admin rather than getting solutions to patients.

So how does COVID-19 play into this theme? The tragedy with COVID-19 could not be a stronger example of population versus resource imbalance. Countries around the world with limited resources are trying to tackle an existential problem for the population. The supply and demand piece at this time is a major focus, the availability of vaccination compared to the demand. This way of looking at thematic investing has never been more relevant than it is during these times. With the pandemic the initial focus was all about healthcare innovation but that led the population to start to think more widely about other issues such as the environment and climate change. We can see clearly that expansion of thinking with the ever-growing popularity from all quarters of ESG investing.

So, does this mean that once the vaccine has been rolled out and the threat of COVID-19 diminishes, will the focus move away from Healthcare Innovation? No this will not be the case, whilst some other themes may become more headline grabbing, the need for innovation in healthcare will remain strong. The fundamental issues of a growing population, a longer life expectancy and the limitations on resource still remain. Healthcare will need to continue to prepare for the next event, hopefully not as bad as this pandemic. This is similar to what happened after the Global Financial Crises of 2008/9 which led Banks to make preparations for the next crisis. COVID-19 has brought about innovation in healthcare which is likely to continue such as the way vaccines are developed and visiting the doctor online.

Another COVID-19 implication which has affected our day to day lives is the way we do business with the innovation of the likes of Zoom and Teams diminishing the need to travel. This has had a really positive impact on the environment.

The energy transition piece has become essential with the Government looking to spend in this sector to boost our economy. One hundred trillion dollars of investment needs to go in between now and 2050 according to Schroder’s.

The subject of sustainable growth was raised, companies now think more broadly than just the shareholders. The thinking now is more about stakeholder capitalism. There is a real imperative now for companies to be seen to be doing the right thing.

A question was asked regarding climate change to what extent is it about avoiding risk. David told us there is an element of not investing in certain companies, but it is more about investing in companies that are adapting or mitigating providing a more positive and innovative look at climate change. Another question was raised regarding whether investors and advisers will change their investment advice based on what we understand now. David commented that investors increasingly want to access areas where they have an emotional and intellectual connection. Thematic investing helps them do that. If the investment managers are right in identifying the companies then thematics that can deliver long term growth.

A theme that was raised by the audience was education and, although it was a really key theme, Schroder’s found it difficult to build a universe around education stocks as they weren’t pure enough. A challenge was made as to whether thematic investment managers would only look at larger businesses for investment whereas smaller companies who are not listed could be more focused on thematics. Schroder assured us that in fact these smaller firms were considered, and the real art was picking the winners.

Conclusion

With thematics one needs to think about the fundamental need of what is driving humanity. The things that mattered in the past and that matter today are likely to be the things that matter in the future. COVID-19 has brought about an acceleration in the adoption of new technologies. E-commerce is a prime example of COVID-19 driving its usage. This is having a fundamental affect upon the retail industry and the way the majority of people shop.

Thematic investing is distinguished by the fact that it is focussed on the theme regardless of the sector and does not have global constraints. David told us Thematic investing must remain true to the underlying theme and must be authentic.

From an adviser point of view the idea of a global thematic or multi thematic fund seemed to be more appealing than individual themes.

The debate over thematic investing and what it meant and what it should be called continued on after the session finished.