Thematic investing can be defined as being investments that are intentionally future-focused around specific emerging trends that are expected to evolve over time. As the discussion commences, the panellists demonstrate a range of understanding and interpretation of, and exposure to, thematic investing as a concept.
Nathan Elstub is chair of Nesta investments. He explains that Nesta is a £450m endowment. “It became an independent charity in 2011 when it was spun out of the Department for Business where it was previously an innovation quango. As a charity we have carried that innovation mission forward with a social focus. We are unusual as we are an active direct investor and have committed roughly £100m to invest in mission-aligned early-stage tech ventures, so in that sense we are deeply thematically invested in mission-aligned businesses.”
The Dunhill Medical Trust is a foundation with a £160m endowment, funding grants for scientific research. Andrew Gnaneswaran, its head of investment, is only in his first month in post but says part of his role will be to explore an intention to invest in impact, in line with its mission.
Richard Croydon is head of finance at the Sainsbury Family Charitable Trusts, which are 17 individual charities with separate boards. “My team provide finance support to all of them, and while there is no collective view or opinion, there is some collaboration and a general desire to have more impact with our investments. Most of the endowments are managed externally, some take a thematic approach, but some don’t, so comparing and contrasting different strategies is interesting.”
The Friends Provident Foundation is described by its director, Danielle Walker Palmour, as being set up from dormant assets before the concept really existed. She explains: “Friends Provident plc gave a proportion of unclaimed shares to the foundation, but then made the trustee board wholly independent, giving themselves no nomination rights. Since Friends Provident no longer exists as a company, our name is the last remaining element of it.”
As such, she says they don’t think of themselves as having an endowment but as being a capitalised charity. “We try to use all money in pursuit of the mission and look at impact across all of it. Our main programme relates to a fair and sustainable economy. We are also active in making all foundations fit-for-purpose charities for the 21st century.”
Rachel Titchen has been a charities investment consultant at Broadstone for three years, having previously focused solely on pensions, and is passionate about mission-aligned investing and helping charities spot opportunities to align investment strategy. The area of thematic investing is very much to the fore. For her, the key is about improving understanding. “If you don’t know the right questions to ask, how do you get the right answer?”
After reflecting on all of this, Rob Powell, head of thematic and sector product strategy at BlackRock, begins by saying that thematic investing has a broad mandate, and summarises BlackRock’s history in this area.
“We started in 2016 when we launched four thematic exchange-traded funds (ETFs) which were initially focused on European private banks. These funds specialised in structural change or disruption. We looked at the most important drivers of change in the world and allocated to those in the belief that those companies will be rewarded in the long term by being aligned to those trends.”
He admits that this was much more successful than expected. “What started out at $10m peaked at $40bn a couple of years ago. The challenging markets since have seen a slight drop, but we are still at $34bn. We have built up a range of investment products across 25 themes. We are unique in this space as investments are based on index tracking funds as well as actively managed strategies. Essentially, we start by thinking whether a theme can deliver over the long term, then explore the access point that makes the most sense.”
Powell briefly describes what the initial four themes were. “The first two were automation and robotics, and healthcare innovation. The third was the aging population. This is a slightly broader strategy as it includes financial services such as saving for old age, as well as care, chronic disease treatment and drugs. The inclusion of leisure was another new dynamic, all captured within an ETF.”
Finally, there was digitalisation. “This one is interesting as it sounds futuristic but we are now evaluating as to whether this theme needs broadening out from ecommerce.”
Mega trends
Powell explains that five key mega trends underpins all of its themes. “These are climate change and resource scarcity; tech breakthroughs; demographics and social change, including population dynamics; shifting economic power and emerging global wealth, including the growing importance of non-US and European countries; and rapid urbanisation.”
Those five trends have always underpinned BlackRock’s funds but the focus has changed. “Climate is increasingly now central to all of the other trends and a key driver of them.”
Titchen says that she sometimes finds that charities do want to put money into impact investment. “But they spend lot of time and money focusing on what is only 5 to 10% of assets and commit to it. It has varying levels of risk and return opportunities. Thematics can fill up more of an asset strategy and mean you can take more of a position. Fundamentally there is no reason why it can’t take up a bigger part of your portfolio so you can push it further to be aligned with your fundamental objectives and mission as a charity.”
She thinks there is an education piece for charities on how these things can be linked together, and on building a portfolio that can tackle a number of elements.
Powell points out that people are increasingly using thematics to meet their individual investment preferences. “A growth in products means more alignment of thinking between portfolios, and looking under the bonnet to ensure the strategy meets an investor’s needs.”
Elstub adds: “With Nesta’s indirectly managed portfolio, we don’t have a thematic approach at the moment. We use the single best-in-class manager in different asset classes. But our chunk of assets directly managed are extremely mission-aligned in our focus areas of decarbonisation, obesity and early years education. We are interested in the idea of how we put more of the endowment into mission-aligned activity, but need to ensure we don’t unbalance our portfolio and maintain fiduciary discipline when getting into more focused areas of investment.”
For Walker Palmour, it is about perceptions of risk. “Is there a view that a thematic approach would bring more risk? This may be the reason why charities are more cautious, even if that isn’t in reality correct. Hence why they keep a balanced portfolio generally and only make a few what they consider riskier direct investments.”
She says she sees these assumptions a lot on investment committees.
“The whole purpose of investing can vary. In some charities, there is a view simply to maximise income and returns. But sometimes the reason to invest is for impact, and that impact has a justice element. It isn’t just about transition but it being a just one. Therefore, a thematic approach means communication that the iteration of the theme moves from not just doing no harm, but doing active good, with investment as a tool.”
One of the key things when charities are making an investment, says Titchen, is that you can only see return and the positive impact of that. “If you make an investment into something mission-aligned, you can consider the entire portfolio to be doing something for your charity rather than just the return it generates. Using the entire asset allocation has a massive impact if you can quantify it. With thematics, you can talk about the actual cash value of investments you have made to a cause that is in line with your objectives. It goes so much further than return and the risk element. Focus on what endowments are there for. The value of assets can all be used in some way to further the cause. This is hugely powerful.”
Elstub agrees but argues that it isn’t always simple. “For example, an education or health fund isn’t necessarily a just fund. Our organisations exist to support those with the deepest needs. There is a nuance. You have to make sure within a theme you are investing well and in a way that is aligned with rebalancing, social justice, and supporting those with the deepest needs. But it can be really hard to do that, especially when supporting the most disadvantaged. Thinking through the economic effects of how it all washes through, and the trade-off between financial return and impact needs wrestling with, although fundamentally it is hugely important and can be done.”
Gnaneswaran considers portfolio construction. “How do you marry a balanced portfolio with no risk with being overweight in an area that you care about? Assessing both the positive and negative impacts is really complex. We are invested in healthcare funds. That doesn’t mean we are helping reduce inequalities for everyone.
“For example, funding scientific research is great, but if it only helps those who can afford to pay for the results, is that reducing inequality? We are not yet at a stage where we can understand and measure that stuff, but aiming for a place where we can look at our investment and assess impact. There can be a difference in terms of intentionality. We are not allocating to healthcare to generate an alpha, we are funding innovation in that space that will lead to social good. I think it is different for thematics where they look for alpha in the short term. But in the long term, if it delivers solutions that is fine.”
Theme washing
Powell moves on to the “true to label” angle. “When you invest in a theme that sounds like it is aligned to your investment objectives, it is important that the product is backed by a robust construction process. We hear a lot about greenwashing. But there is also theme washing, where you have a name that sounds right but when you delve deeper it is less impressive. This is why we put an emphasis on research to ensure this doesn’t happen. How do we truly assess that we are investing in the right area? We are not looking at impact with the same level of granularity as charities do on the broader social impact of an investment, but when we are constructing a theme, we do seek outside help.”
Time horizons
Titchen raises the issue of timeframes. “While a lot of charities are investing for perpetuity they do need short-term income.”
Powell regards 2020 as a time when there was an acceleration and broadening of interest in thematics. “We saw accelerated disruption playing out in the world, and permanent changes to our lives. One thing we talk to clients about is the sell discipline. For example, it is easy to buy robotics on a 20-year view but how can you be smarter about your flexing position. There will be periods where the themes will underperform, and cyclicality.
Take renewables for example. This has been a theme for 20 years. There was an amazing period driven by the US and Chinese governments putting in place stimulus packages, which made it attractive. But when the subsidies were removed in the financial crisis, there was underperformance for renewable companies. That doesn’t mean the long-term view on the potential of these themes changes but highlights the importance of monitoring.”
Croydon muses on how the world is complicated, as is the investment process. “There are many different layers. A lot of our charities’ boards have picked up on ‘do no harm’ as the first objective, so create exclusions. They then try to think about ESG, and see how that can be effectively incorporated. There have been some bad experiences with fund managers saying they were doing certain things and trustees being understandably upset when they found they weren’t, but that has settled down.
“Some of our charities use thematics in the context of not restricting the scope of investments, and assessing the landscape of risks that can be taken. You can use it as a starting point for the whole portfolio. Some trustee boards are thinking about the higher-impact/higher-risk parts of the portfolio, and being mission-aligned in those, but that is not the same as taking a thematic approach to a whole portfolio. Thematic seems such a great way of mission alignment as it can be implemented without restricting investment scope.”
Thanks to BlackRock for its support with this article
Related articles
