Scientific advances bring both threats and opportunities for investors. Technological progress can render some business models obsolete, but at the same time open up new avenues of growth and wealth creation.
Taking a thematic approach is one way to try and profit from a changing world. This involves investing in a collection of companies in certain areas you think will generate above-market returns over the long term, or that might benefit from certain structural trends such as combating climate change or an ageing population.
As themes are not related to regional economics or politics, investing in this way could further diversify a portfolio currently allocated according to geography. Here are three major themes we believe could be key drivers in the investment world for years to come – as well as have a major impact on our daily lives.
Robotics and automation
Robots are already widespread on the factory floor, but with breakthroughs in artificial intelligence and the connectivity of objects through the internet they are becoming an increasing part of our daily lives.
Modern robotic devices have a remarkable capacity to gather, process and act on information, providing them with dexterity, versatility and cognition. In the healthcare industry, robots are already working alongside surgeons, helping with delicate and complex procedures.
They could also prove vital to the global economy. Robots and automation have the potential to boost productivity, offsetting the impact of a shrinking population and falling birth rates. They can also contribute to a more efficient use of scarce resources, improve the quality of goods and services and revolutionise business models through mass customisation of products. Importantly, it is an area of technology that is being applied across multiple industries, markets and geographies to help boost profitability.
Investing in this theme involves targeting companies involved in robotics hardware, those developing the latest technologies and software in robotics and those deploying the technologies in new applications. The risks are significant, though, with the industry still very much in its infancy. Growth rates are potentially volatile and unpredictable and certain technologies may not come to fruition or reach commercialisation.
One way to invest in the theme
LGIM ROBO Global Robotics and Automation GO UCITS ETF is currently comprised of 83 underlying holdings across 11 countries. The fund is currently divided roughly equally between technology businesses (that develop and sell the products and services that enable robots to ‘think’, sense and act) and those that use robotics and automation solutions in order to enhance profitability.
The fund is passively managed but tracks a specially designed index constructed to capture emerging trends and identify the most promising new technologies. It also aims to capture the broader growth opportunity of small and medium-sized companies in the area rather than emphasising the largest firms. The Ongoing Charges are 0.8% a year. Please note standard Charles Stanley Direct platform and share dealing charges apply to shares and there is a difference between the buying and selling prices.
Cyber security has become an inescapable issue and a top priority for companies and governments worldwide. As more and more aspects of our lives are digitalised businesses have a greater reliance on the internet for a huge array of functions. As can be seen from the reports of security breaches and high profile attacks, no individuals, businesses or even governments are safe. As a result they have all been spending more to safeguard digital assets.
While other tech sectors are driven by reducing inefficiencies and increasing productivity, cybersecurity spending is driven by the necessity to combat an unprecedented level of cybercriminal activity. This looks set to continue amid greater government regulation, increased corporate focus and the growing complexity of threats. Advisory firm Gartner predicts total worldwide spend on security products and services will hit $100 billion this year with 8% forecasted growth a year going forward.
As a global theme, the long-term opportunity for investors is clear. However, companies in the cyber security field are heavily dependent on patent and intellectual property rights. The loss or impairment of these may adversely affect profitability. They might even be the target of cyberattacks themselves, which, if successful, could significantly damage a company’s reputation, financial condition and ability to conduct business. Taking a diverse approach incorporating a variety of companies in the field therefore makes sense.
One way to invest in the theme
In Europe, there is currently only one exchange traded fund (ETF) which holds a basket of shares focusing on cyber security. LGIM ISE Cyber Security GO UCITS ETF aims to track a specialised index comprised of companies actively involved in providing cyber security technology, services and infrastructure. The ETF is currently comprised of 38 underlying holdings across 6 countries.
Most holdings focus on infrastructure – hardware or software for cyber security such as anti-virus and network security solutions addressing a broad array of attacks including malware, spyware, phishing, malvertising or denial‐of‐service. The fund also invests in shares in Service Providers – clients of which tend to be involved in the manufacturing of secure credit cards, network authentication devices and/or electronic identity documents.
The Ongoing Charges are 0.75% a year. Please note standard Charles Stanley Direct platform and share dealing charges apply to shares and there is a difference between the buying and selling price.
Breakthroughs in energy storage are changing the world, paving the way for widespread use of electric vehicles and helping overcome the problem of intermittency in sources of renewable energy. This is likely to be a multi-decade trend supported by government regulation to reduce carbon emissions.
Several governments have stated their intention to phase out the use of the combustion engines as much as possible and focus on cleaner electric vehicles. Meanwhile, dwindling fossil fuel reserves means there is an increasing focus on grid storage; in particular storing power generated from renewable sources that are not 'on demand'.
The global market for advanced battery and fuel cell materials reached $22.7bn in 2016 and is expected to reach $32.8bn by 2022 according to BCC Research. It’s not just companies involved in the development of batteries that can benefit. Demand for lithium, for example – a material used in the manufacture of some of the most efficient batteries – is expected to grow at an average of 13.7% a year from 2017 to 2022, partly due to the anticipated boom in electric vehicle production.
Once again this is a higher risk area. Battery-producing companies may rely on patents, copyrights or trade secret laws to establish and protect their proprietary rights in their products and technologies. Steps taken by these companies to protect these may not be adequate to prevent misappropriation. In addition, the emergence and evolution of more advanced, price-competitive technologies are opportunities to some but could threaten the viability of others.
One way to invest in the theme
The LGIM Battery Value-Chain UCITS ETF aims to track a customised index that incudes companies involved in developing technology according to their technology type: lead-based, lithium-based, nickel-based and sodium-based. It also incorporates lithium miners classified as current producers – as opposed those at the earlier stage of exploration. There are currently 28 constituents.
The Ongoing Charges are 0.75% a year. Please note standard Charles Stanley Direct platform and share dealing charges apply to shares and there is a difference between buying and selling prices.
Please note the baskets of companies that make up each of these investments contain a significant number of small and medium-sized businesses. Although some of these may be industry winners in the coming years their inclusion adds to the risk of what is already a specialist and high risk investment. Funds such as these should only make up a small proportion of a diversified portfolio.
This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.