Most savvy investors have a portion of their portfolio given over to emerging markets. Investors have revelled in the future potential of these economies, with their rapid pace of urbanisation and their burgeoning young populations.
Whether you know it or not, investing in the future of emerging markets is a form of thematic investing. This is where an investor notices a macro-level trend likely to take off one day, and works backwards to find companies which can benefit from the theme.
In terms of investment returns, emerging markets have been dismal in the last decade. But there are some far better themes out there – including ageing populations, water scarcity and the recovery of the finance sector. All of these trends have made returns well ahead of the FTSE 100 in the last few years.
“Investing thematically allows you to consider important issues such as demographic and social changes, shifts in global economic power, rapid urbanisation, climate change, resource shortages, or technological innovations,” explains Peter Lowman from wealth manager Investment Quorum.
For a more adventurous investor, he recommends allocating up to 25 per cent of a portfolio to thematic investment, although this should be considerably lower for the more cautious.
The legions of old people who now make up an increasingly large chunk of the population in Japan, China, the US, and Europe are creating demand for businesses specific to their needs.
Demographics across the developed world are shifting, and today one in six people in the UK is over 65. This trend will only accelerate, and by 2050 this number will reach one in four. Companies targeting the older generation – typically with healthcare, spectacles, cruise holidays and golfing resorts – are in a strong position. The most well-known fund solely invested in companies related to ageing populations is the Lombard Odier Golden Age fund, and it has returned an impressive 71 per cent over the last five years – beating both the S&P 500 and FTSE 100.
This fund is 40 per cent invested in healthcare providers, but it is not just dentures and heart tablets. The biggest investment in this fund is botox manufacturer Actavis, which is growing sales twice as fast as the wider market. “The demand [for botox] keeps growing every year and the market is pretty resilient,” explains manager Johan Utterman.
He has also invested in Pets At Home, since “older people tend to own pets”, and Norwegian Cruise Line, which is branching out to the Chinese market.
An alternative way to play the trend is with the CPR Silver Age fund, which has similarly good performance. Investors could also access this theme without investing in a dedicated fund, either by buying individual stocks or a specialist healthcare fund. The best performing healthcare funds over three and five years are Polar Capital Healthcare Opportunities and JPM Global Healthcare.
The world’s most precious resource is becoming scarce, as rising population density puts pressure on supplies. The problem is particularly acute in China where, in the arid North, there is less water per capita than the Middle East. Last year, authorities committed to spending $330bn on ensuring clean drinking water for the population. Water is spoiled faster than it can be replaced, and in the decades to come governments will be forced to prioritise spending on clean supplies.
The global water industry consists of companies aiming to treat, recycle and desalinate water, and these businesses are growing much faster than other sectors. A basket of water companies listed on the MSCI ACWI Water Utilities TR index has risen 128 per cent over the last five years, compared to 42 per cent from the FTSE 100.
There are a number of specialist funds focused solely on investing in water-related companies. The RobecoSAM Sustainable Water fund, for example, buys shares in companies around the world and has performed well in the last several years.
Desalination is a big theme for water investors currently, says manager Dieter Küffer. Governments in the Middle East have found their plans for development hindered by lack of water, and are building out new plants to make salt water drinkable.
Küffer has invested in Veolia, which is best known in the UK for performing outsourcing work for local councils. However, it also builds and operates desalination plants in arid areas, including Iraq and Oman.
“Veolia are a very big company with a range of business operations, but in the area of desalination they are very efficient,” he explains. “Desalination is an area which is really growing.”
Other specialist funds in the sector include Pictet Water and KBI Water. Investors considering buying individual shares could consider US company Danaher Corporation, which is one of the leaders in the water testing industry and is the biggest investment in Küffer’s fund. Part of the S&P 500 index, its share price has risen 114 per cent in the last five years.
In the depths of the credit crisis six years ago, the financials sector consisted mostly of battered shares in companies no sensible investor would touch. Banks, insurers and asset managers all suffered heavy losses, but years of regulation and recapitalisation mean many are on the road to full recovery.
“Companies have been put under pressure to get their acts together,” says Guy de Blonay, manager of one of the best specialist funds in the sector, the Jupiter Global Financials fund. It has made 62 per cent over the last three years, compared to the 36 per cent return from the FTSE 100.
Shares in asset management firms have done brilliantly in recent years, as their own investments in global stock markets have provided good returns. Shares in Aberdeen Asset Management have risen 253 per cent over the last five years, while Schroders’s shares have risen 137 per cent. “If you are positive on stock markets you have to be positive on asset managers. They are a good proxy for equity market performance,” Blonay explains.
Aside from buying a specialist financials fund or individual shares, investors could also consider a UK equity fund with a high weighting to financials. The Old Mutual UK Equity Income fund has strong performance and manager Stephen Message has been buying up shares in financials recently. Its focus on companies paying out high dividends will also boost returns for investors in the fund.