silver lining
With its potential stretching as far as the eye can see, thematic investing has been proving its worth during the pandemic
technological eruption
As lockdown has forced society behind closed doors, the world is resorting to virtual measures, increasing the demand for more innovative tech
While other sectors find themselves trapped in harsh environments, technology continues to boost its trendy reputation
ADVERTISEMENT FEATURE
Investing in the future of innovation
Audrey Raj - Editor, Asia Citywire
Silver lining
Oasis or mirage?
Technological eruption
SPONSORED CONTENT
IN ASSOCIATION WITH
Has the pandemic worked in favour of thematic investments? This special supplement examining some of the up-and-coming megatrends explores this question. Many Asian economies have leapfrogged a generation of infrastructure development, landing straight in mobile technology as their first point of priority. China is one exemplar, where mobile penetration is high and mobile apps have been at the forefront of driving secular changes in the country. Another boon amid the lockdown is e-gaming via ‘real-life’ sports entertainment. With high-speed 5G penetration, there is huge potential for phenomenal growth in e-sports in the coming years, both from a viewership and monetisation standpoint. Mobility, particularly in the form of electric vehicles, is another favourite among many wealth managers. In a recent virtual roundtable discussion chaired by Citywire Asia, all participants showed optimism around this theme, especially from a climate change perspective. From raw materials and battery manufacturers to suppliers of electricity and charging infrastructure, mobility provides immense long-term investment opportunities – but not without challenges. Read on to find out more!
oasis or mirage?
The idea that the Covid-19 crisis has provided a boost to environmental transformation is a false positive, according to some experts.
INVESTING IN THE TRENDS SHAPING THE FUTURE
Is Generation X in the EV driving seat?
BACK TO THE TOP
Lay of the land
Burning bright
burning bright
Both active and passive strategies are capable of tapping into themes and megatrends, but has the pandemic fuelled one more than the other?
NEXT STORY
PREVIOUS STORY
By Andrew Wong
Technology remains as entrenched as ever in the megatrends of today, with the sector pulling in $4.52bn in net inflows over a year ending in April. While names such as Microsoft, Apple and Alphabet have become familiar investor favourites, companies such as Tencent Holdings, SoftBank Group and Alibaba have also started to prove themselves. Case in point, the Fidelity Global Technologies fund – managed by HyunHo Sohn and featured as one of the top thematic funds by net inflows – counts Apple, Samsung, Alphabet, Microsoft and Softbank Group as top holdings within its portfolio, according to its latest factsheet. Additionally, healthcare has been brought back to the forefront as the pandemic shines its light on companies in the sector. However, this could act as a double-edged sword, as companies focused on securing a vaccine for Covid-19 can see its fortunes change quickly, such as negative reports on test outcomes in the case of Gilead Sciences. Regardless, the sector has remained resilient in the current market environment, with healthcare equity a fixture within the top sectors by inflows over a year ending September 2019.
Categories with the largest inflows
Best-selling thematic funds by estimated net inflows
On the other hand, markets during the tail-end of 2019 and the first five months of 2020 have been plagued by a pandemic. In particular, funds investing in energy, mining, timber and water issues have seen the greatest fallout with the sector registering net outflows of $1.18bn. The pandemic has led to demand weakness and fear in the commodities markets, which have in turn affected the sentiment for natural resource equities. To that end, financial services have also taken a hit. The sector saw outflows of $851m over a year ending April. The common consensus among experts is that banks are generally better-positioned today compared to the last 2008 financial crisis. However, banks also tend to underperform during downturns and a global recession seems to be on the horizon as Covid-19 prolongs economy shutdowns. In fact, UBS Asset Management’s AA-rated Geoffrey Wong had told Citywire Asia in an earlier interview that he was reducing his exposure to banks for his outperforming UBS Global Emerging Market Opportunities fund for the same reason. In particular, BlackRock’s BGF World Financials fund registered net outflows of $546.4m over a year ending April. Over three months ending May, the fund lost 15.37%, although it outperformed its benchmark by 0.21% according to its factsheet. The fund is managed by A-rated Vasco Moreno and counts Citigroup, Morgan Stanley and AXA among its top holdings.
Themes with the largest outflows
Funds that lost the most by estimated net outflows
In the wake of the extreme market volatility triggered by COVID-19, investors must look beyond the crisis for the much-needed clarity they seek for their portfolios. Despite a gloomy economic outlook generally, several trends that were brewing in the pre-pandemic world seem stronger and more likely to flourish in today’s new environment. Digitalization and biotechnology are two of the main drivers of these, due to their innovative nature. In particular, COVID-19 has accelerated changes in consumer behaviour within five influential themes: - An ever-greater reliance on digital activities - Data and cybersecurity as priorities - A new form of (de)globalization, requiring local sourcing and manufacturing - Health care and health supplies, including biotech - Artificial intelligence (AI) and machine learning Key to capitalizing on existing opportunities in these areas, as well as finding new ones that will inevitably emerge, is identifying the future beneficiaries of new norms. It is this durability that investors should focus on given the new habits that are expected to form, such as the reliance on online and mobile activities. In turn, these will breed new areas of demand for products and services. The upshot is that many sectors – from food services to telecommunications – may be worth a closer look today than before the crisis. Keeping pace with disruption Themes spurred by innovation are likely to drive transformation in various ways across multiple sectors over the coming years. With such robust characteristics, these are likely to also be building blocks of resilience for portfolios.
Tech and biotech offer a route to resilience for portfolios in a post-pandemic era. Amid accelerating supportive trends in the wake of the crisis, now is the time to increase exposure to funds offering this access.
Important Information This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. Any research and analysis contained in this presentation has been procured by Franklin Templeton Investments for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Any views expressed are the views of the fund manager and do not constitute investment advice. The underlying assumptions and these views are subject to change. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. Copyright© 2020 Franklin Templeton Investments. All rights reserved. Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E
Among these is disruptive commerce. The rising prominence of e-commerce has quickened notably as consumers have had to avoid physical contact, and now realize how much can be achieved through being contactless. Genomic discovery is another future theme, based on the significant pace of progress in the discovery and development of innovative drugs. In this context, COVID-19 is a case in point: an example of the extent to which the world’s medical and scientific community – along with health care, pharmaceutical and biotechnology companies – are working more closely than ever before. Intelligent machines are also reshaping the investment landscape in fundamental ways. The growing reliance of businesses and consumers alike on automation to produce and deliver goods with minimal human contact represents a diverse opportunity set across industries such as manufacturing, media and transportation. New finance, meanwhile, is making ever-deeper inroads into everyday life. Encouraged by their progress, payment providers will continue to reduce payment friction and physical contact in traditional commerce. Perhaps leveraging all aspects of the digital revolution is a further key trend – the exponential use and application of data. Annual data generation is expected to reach 44 zettabytes (44 trillion GB) by 2020, creating demand for Big Data services and applications as this information needs to be processed. Already the reliability and delivery speed of data has helped businesses to continue to function efficiently through video conferencing and work collaboration, while consumers are increasingly entertaining themselves, at home, with over-the-top entertainment programming, socializing and video games. At the same, and tied to these new demands, is the requirement to manage cybersecurity for governments, corporations and individuals worldwide. Reshaping business models As businesses re-emerge from the economic shutdowns around the world, it looks ever-more likely that newly defined “strategic industries” will require local sourcing and manufacturing. Health care and health supplies, for example, along with food services, 5G networks, telecommunications and, perhaps, some additional technologies, will increasingly be domestically manufactured. In line with this, supply chains will change from “just-in-time” inventory management and manufacturing to “just-in-case.” Companies are likely to move manufacturing and supply chains away from China towards other countries, including their home markets. Although less efficient and, potentially, more costly for many companies as well as for consumers, this trend will benefit those companies that help localize supply chains. Technological innovations such as robotics, 3D printing, AI and automated production facilities, for instance, will allow manufacturing to be more local. As “work from home” evolves into “work from anywhere”, many businesses will either allow – or, in some cases, require – their employees to be located outside the office for specific reasons. Video streaming and conferencing have recently shown that they can quickly become the norm for meetings and events. For example, Microsoft Teams saw a 500% increase in calls in China between January and mid-March 2020. Tapping into tech and biotech sentiment Investing in innovation requires a longer-term view, to look beyond current uncertainty and volatile markets. This approach is reflected in equities as a long-duration asset. The process is achieved via rigorous bottom-up selection, anchored in the sustainability of business models and the growth potential of the sector, more broadly, over the longer term. Cloud services, with rising demand, will be value drivers of a fund, especially in the context of their application for all types of businesses. The appetite for analytics in much greater depth and volume, along with access to documentation and an ability to engage with employees, has continued to demand increased spending on Software-as-a-Service (SaaS) and Infrastructure-as-a Service (IaaS) – this grew at compounded annual growth rates of at least 30% from 2015 to 2020. Companies that apply AI solutions are another source of tried-and-tested resilience within funds. Not only did companies that provide intelligent searches or optimised digital advertising, for instance, outperform during the height of the volatility during COVID-19; in general, industries that are benefitting from AI ‘augmentation’ are set to gain from the fact that AI is expected to contribute up to US$15.7 trillion to the global economy by 2030. Within biotech, meanwhile, three areas of innovation set to transform the standard of care for many difficult-to-treat diseases. As a result, they are well-placed to create value in the long term: - Adoptive T-cell therapy – as one of the various immunotherapies available, evidence shows its success in some cases in generating long-lasting remissions in patients who have failed multiple lines of therapies and would otherwise have no other treatment options left. - Precision oncology – although not new, there has been a recent surge in the number of new drugs that are even more effective and better tolerated than existing options in targeting specific mutations or gene alterations known to cause certain cancers. Further, there is a lot of innovation happening in the discovery of small molecule drugs for oncology. - Gene therapy – this is another existing concept that has made big leaps in recent years, with far-reaching innovation in this area across many devastating diseases. These biotech opportunities will gather even more momentum as a result of the broader health care-related trend of ageing populations globally. That will continue to drive health care demand given the expected higher levels of spending on drugs and medical services*.
Ultimately, across all aspects of the tech and biotech space, the focus must be on funds that include sectors which offer strong competitive advantages, fuelled by companies with robust balance sheets and healthy free cash flows. This indicates an ability to weather the economic downturn and volatility over the near term and a strong likelihood of being able to gain market share from weaker peers going forward.
Source: As of December 2018. Centers for Medicare & Medicaid Services, National Health Expenditure Data, most recent data available. First projected year is 2018. There is no assurance that any estimate, forecast or projection will be realized.
*Source : As of December 2018. Centers for Medicare & Medicaid Services, National Health Expenditure Data, most recent data available. First projected year is 2018. There is no assurance that any estimate, forecast or projection will be realized.
‘The perception that the coronavirus, for all its devastating effects, is helping to tackle the climate crisis is dangerous,’ said Deirdre Cooper, co-portfolio manager on Ninety One's Global Environment fund. ‘Global carbon emissions might fall by 5% this year, a blip in the trend of recent decades, and they’ll resume their former trajectory when the economy starts to recover.’ Which could be happening in China, where greenhouse gas emissions are coming back even stronger amid the desire to quickly return the economy to strength. Danielle Welsh-Rose, ESG investment director for the Asia Pacific at Aberdeen Standard Investment (ASI), said the pandemic had caused delays to climate change action, including the postponement of COP26, a reduction in Capex commitments impacting green investments, and the delay or rollback of certain environmental policies. ‘However, we believe that corporate focus on long-term climate goals needs to remain a priority,’ Welsh-Rose said. So is this a turning point in the climate change story? According to environment-focused asset and wealth managers, yes and no. ‘I think it could be a turning point, although I wouldn't want to say for sure, but if it is, it’s certainly an overdue one,’ said David Smith, Asia Pacific head of corporate governance in Asian equities at ASI. ‘There has been a lot of discussion around the reduced air pollution and reduced carbon emissions, but it’s worth remembering that we’re only back to 2006 levels and that these may spring back when economies reopen,’ Smith said. ‘That worries me, in that we could see a lot of pent-up demand for products (leading to more carbon emissions from manufacturing supply chains) and for travel (leading to more carbon emissions from air travel). The second half of this year, or first half of next year, could well see bumper emissions.’ ‘What this has done is merely illustrated the anthropogenic nature of much of the pollution we see around us,’ said Julian Wee, investment strategist at Credit Suisse. ‘This, in turn, strengthens the arguments for doing more to make consumption, manufacturing and all other business processes more sustainable and environmentally friendly. This is likely to mean more pressure from governments, consumers and investors for sustainability to be a key part of business plans.’ Accelerating trends Ingrid Kukuljan, head of impact investing at Federated Hermes, sees the pandemic as more of a catalyst to accelerate existing trends than as an agent of change in and of itself. ‘The plethora of surveys suggest a polarisation between those expecting a return to some kind of pre-Covid-19 normality versus those anticipating a permanent shift in behaviour to home-working and heavily reduced travel. ‘Our base case assumption is that it will take a few years to return to the level of emissions we saw in 2019. This is due to a mixture of reduced travel, more flexible working, greater climate change awareness and “green” stimulus from central banks and governments.’ But what about the cheap oil price? How will this affect any positive momentum? ‘A common misperception is that cheap oil will derail the transition to clean energy,’ Ninety One’s Cooper said. ‘It won’t – first and foremost because oil is not typically used to generate electricity. As for other fossil fuels, renewables are already so much cheaper than coal and gas in many parts of the world that changes in the prices of the latter hardly matter. The coronavirus may delay near-term growth for some decarbonisation businesses, but we think recent events are ultimately more likely to accelerate the shift to a lower-carbon world.’ The path may have been paved for governments to force through such a shift, especially among high carbon-emitting sectors that have received rescue packages, such as airlines, auto manufacturers, construction companies and so on. ‘This might be a unique opportunity to force these sectors to align their business models in the fight against global warming,’ said Jean-Louis Nakamura, Asia Pacific CIO at Lombard Odier. However, Nakamura said things were not that straightforward. ‘In the face of unprecedented job destruction, some governments might step back when faced with lobbying by industries, suggesting that more environmental conditionality might slow the pace of recovery. For example, Norway just decided to massively cut taxes on its domestic oil companies, significantly curbing the post-tax extraction costs of its domestically-produced fossil energy.’ Overall, however, Nakamura believes that momentum will be strong enough to magnify pre-existing trends in de-carbonising policies, although these were far from adequate to meet the Paris Agreement objectives and are likely to trail what is actually required.
By Neil Johnson
We could see a lot of pent-up demand for products, leading to more carbon emissions from manufacturing supply chains, and for travel, leading to more carbon emissions from air travel
Special treatment Nevertheless, some green industries may be in line to enjoy an upsurge in preferential policies and subsequent investment. Indeed, Kukuljan continues to see a huge opportunity in renewable energy, globally. ‘Our exposure is primarily to European companies – for example, Orsted, a renewable-focused utility, in Denmark and Siemens Gamesa, a wind turbine manufacturer, in Spain. ‘Production costs have fallen precipitously, to the stage now where renewable wind can compete with fossil fuels on an un-subsidised basis. We anticipate double-digit growth in the industry for many years to come. ‘We have also invested in companies exposed to the auto industry, helping facilitate the transition to fully electric vehicles from internal combustion engines. In addition, we have exposure to companies enabling reduced emissions from buildings. These are critical products given that buildings account for around 40% of all global carbon emissions.’ ASI is invested in energy efficiency, renewable energy, battery storage and electrification themes, but Smith said that it goes beyond merely picking a theme and hoping a company will do well within it. ‘We know that renewables are increasingly competitive versus fossil fuel, for example, but identifying the winners from this shift is harder than identifying the losers,’ he said. ‘Identifying the right place in the value chain to invest, and the right company, is something that we have been doing a lot of work on.’ Another angle for ASI is focusing on companies that are re-engineering their business processes towards these issues. ‘While they may not be developing products or services that actively combat climate change, they are actively managing their processes to mitigate and adapt to the impact of climate change,’ Smith said. Government guidance Governments will remain a key influence of when and how decarbonisation drives economic growth, Cooper said. ‘So investors seeking the businesses most likely to benefit from this tailwind need to watch it closely. Overall, we have no doubt that policy will continue to support the energy transition, near-term delays notwithstanding. But the pandemic clearly alters national policy priorities, budgets and political climates. ‘Some of these changes could massively spur businesses positively exposed to decarbonisation, others may create headwinds – which may be dangerous for companies with weaker balance sheets and fewer competitive advantages.’ Kukuljan warned of the age-old challengers to positive policy movements – ‘vested interests who lobby aggressively for the status quo’. ‘Corporate lobbies and intransigence remain, and a cohesive plan for climate change needs multinational co-operation. Thus political division is another key risk. Innovation remains the key, and technological advances will play a crucial role in helping us achieve a more sustainable environment.’
Thematics philosophy The creation of Thematics AM with 6 experienced portfolio managers, was driven by a desire to develop specific expertise focused on a particular management style, combining both flexibility and robustness. For us, thematic management is the best way to capture the secular growth of markets. We started from a blank page to implement what constitutes our DNA: our investment process. We are convinced that thematic investing is an attractive way to achieve sustainable growth. At the same time, thematic investments translate complex evaluation processes into strategies that investors can understand. Our claim: Investors must know what they are investing in. We have identified specific themes that are growing faster than the broader global economy and that remain consistent over time rather than based on seasonal or cyclical trends. Those themes include water, artifical intelligence & robotics, the subscription economy and safety. Our services are aimed at any types of investors, in particular at private banks and retail clients. Our objective is to outperform the markets, but do not follow a strict benchmark. Thematics Asset Management ESG approach At Thematics AM we don’t necessarily believe that a line needs to be drawn between the worlds of thematic investing and ESG investing. What we want to do is fully integrate ESG into our process, so that it’s ingrained in our risk management methodology. We do that by integrating ESG in three key phases of our investment process. We’re also working in partnership with Mirova, one of the acknowledged European market leaders in ESG investing, to get good quality ESG data on specific companies and the portfolio as a whole. Directionally, we would also like to provide our clients with an analysis of the impact of the portfolio relative to the UN Sustainable Development Goals (SDGs). As strong believers in secular themes that are shaping the world of tomorrow, adopting a sustainable and responsible approach fully subscribes to our thinking. Increased urbanization, demographics, digitalization, rising living standards in addition to the necessity to adapt to climate change all present investors with opportunities to benefit from new areas of growth. These are some of the long term structural shifts that we see today and that we anticipate will continue to change the way we live and work in the future. When considering a long term investment horizon it is essential to also consider environmental, social and governance factors that are likely to impact a company’s risk profile, the obvious reason being the longer the time horizon the more likely it is for those risks to materialize over time. We also believe that ESG integration leads to better informed investment decisions, helps mitigate portfolio risk and supports long term value creation for asset owners. At different levels all the themes that we focus on are impacted by the primary forces that shape our thinking : demographics, innovation, globalization and scarcity. Safety Safety, by definition embodies the need for a safer and better world. The need to protect people on earth is deeply rooted in creating environmental security, social balance and governance that leads to virtuous activity and sustainable wellbeing. To provide a concrete example, climate change holds many safety implications. In the US, while climate change is extending the now familiar drought situation in California, decades of poor forest and land management have rendered the state a tinderbox. More and more Californians are living in remote, fire-prone areas of the state, doing too little to make their houses and communities resilient in the face of fire danger. With human lives at stake, demand is finally increasing for the technologies and services that can help people to find secure locations when their lives are threatened and to keep basic services operational ‘when the lights go out’. Water Water has perhaps the longest-term secular growth themes underpinning it. Each of these long-term secular growth drivers are, by their very nature, fifty to a hundred year narratives. With Water thematic, we are investing in the only true, life-sustaining resource – via a group of business models that cover the municipal/utility, agricultural, industrial, residential and commercial markets. Simply put – it touches everyone on the planet, in all walks of life, and in every area of the economy from construction to mining through semiconductor production to the manufacture of electric vehicles. In simple terms, there is nothing esoteric about the delivery of water to its end user; it requires the resource itself, energy, but above all, infrastructure – in all of its many and varied forms. In other words – physical assets are crucial in delivering and reprocessing the world’s most precious, but perhaps most underappreciated resource.
DISCLAIMER: This content is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. Views are as of June 2020 and are subject to change at any time. This is not an offer of, or a solicitation of an offer for any investment strategy or product. All investing involves risk, including the risk of capital loss. This is provided for informational purposes only and should not be construed as investment advice. Investment decisions should consider the individual circumstances of the particular investor. Opinions and/or forecasts contained herein reflect the subjective judgements and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers. No part of this content may be reproduced in any manner without the prior permission of Natixis Investment Managers. Natixis Investment Managers
1 Zuora, November 2018
Matthieu Rolin Senior Portfolio Manager at Thematics Asset Management
Nolan Hoffmeyer Senior Portfolio Manager at Thematics Asset Management
Subscription If you have taken recently a hard look at your credit card statement, it’s increasingly likely that you’ll find a few monthly or perhaps even annual subscriptions to a range of services that you use regularly. You most likely recognize that you are paying for a video or music streaming service but you can be pretty certain that these are not your only subscriptions. Over the last decade, we have seen a constant and steady increase in the number of industries and companies that use subscription services to monetize their offering and, in more cases than not, this has been a success. The business model is quite easy to understand. Instead of creating a hit product that will be ‘sold once’, you offer ongoing value such as new content, more personalization, or perhaps access to updates which customers pay for via a monthly or annual subscription. Companies end up building stronger relationships with their customers and successful companies enjoy high renewal rates. And this matters a lot. High renewal rates essentially lead to better revenue visibility (if every consumer renews at the same price, revenue will be at least as high as in the previous year) which in turn means that the company can commit capital to research and development spending with more confidence, offering additional and better services to the customer. This is the virtuous circle that both companies and customers benefit from. Subscribing to a service means you don’t actually own the product. Recent surveys suggest that 68% of adults no longer value ownership and don’t necessarily think that ownership defines what or who they are1. However, what we do value is the ‘usership’ and the experience. But what does this actually mean? To use a simple example that most of us can relate to, we don’t particularly care about owning a DVD, but we do value the experience of watching the movie. There is absolutely no need to buy a DVD if you can simply watch it on a video streaming service. Furthermore, 70% of adults say [1] that the maintenance and costs associated with ownership of material possessions is burdensome and that they would rather subscribe to a service that takes care of these items. As businesses have come to recognize the value and power of data, the adoption of subscription-based models is recognized as an increasingly attractive business model. Think about it, when a customer signs up for a new subscription, the vendor enjoys recurring revenues that are highly predictable, and usually seen as ‘high-quality’. With more confidence on the revenue side, expenses can be budgeted more precisely with R&D in particular being a big beneficiary. With lower upfront costs, corporations are also able to extend their target market to customers for whom the cost was too high in a ‘standard’ model. In a subscription model, you also create stronger relationships with your clients. As a firm, we spend a fair amount of our time qualifying and quantifying thematic opportunities, this is what we refer to as setting thematic boundaries. Firstly the theme identified needs to be underpinned by secular growth drivers (or primary forces) that demonstrate persistent above average growth that is not necessarily fully appreciated by the market. The subscription economy is clearly benefits from technological innovation (digitalization makes it easier to subscribe, big data allows for greater customization…), shifting consumer preferences (convenience, affordable access to a service, declining value of ownership…) and sustainability (shifting away from a buy and waste approach, from a sales model to a service model…). Secondly a theme needs to be diversified (offering access to multiple verticals of the economy) yet focused (identifiable and quantifiable). The subscription economy impacts industries ranging from the telecommunication, media, software, utilities, healthcare sectors through to the retail sector. Finally we identify companies that have both material exposure to the subscription economy in addition to companies that demonstrate leadership positions within segments of our theme. With the right supporting demographic, technological and sustainability drivers in place, we believe the subscription economy is poised to see further, accelerating growth. Consumers and corporates increasingly see it as a model that is a better fit with their consumption patterns. At the same time, vendors also benefit from the model in several ways and are keen to offer more of their services under subscription. We are convinced that subscriptions will be applied to more services in the future while their utilization will also increase.
Acting responsibly is key element of our philosophy, and it embedded in our investment process
HONG KONG
SINGAPORE
The coronavirus crisis is proving an accelerator for disruptive technologies. Lockdown measures may have slowed economies, but they have triggered activity in the ‘virtual’ world, with more people staying at home and harnessing technology. This sudden, forced shift has shown both how adaptable we are and how advanced technology has become, said Anjali Bastianpillai, senior product specialist in the Pictet-Digital arm of Pictet Asset Management. ‘It has also generated a thirst for better tech, and a great opportunity for businesses who can deliver it.’ Anita Killian, senior managing director, partner and global industry analyst at Wellington Management, believes that, over the next five years, Asia tech will broaden far beyond industries traditionally thought of as ‘high-tech’, with once-sector-specific component producers erupting out of the tech industry to add technology to nearly every segment of the economy. ‘Beyond helping to weather the pandemic, Asia tech offers solutions like autonomous cars, predictive train-track maintenance, factory automation 3.0 and improved medical imaging,’ she said. ‘From leading-edge computer chips and image sensors, to simple components like capacitors and compound chemicals, Asia tech is supplying the building blocks of innovation that enable everyday objects to be upgraded to “smart” tech.’ Furthermore, many Asian economies have leapfrogged a generation of infrastructure development to be mobile technology-first. ‘Coupled with the availability of connected devices and smartphones, this has drastically reduced the time for a product to capture a large customer base,’ Killian said. ‘The roadmap to profitability for disruptive technologies can be materially shorter in Asia. Such an environment is incredibly dynamic for technology investing.’ Indeed, in China, where mobile penetration is high, the rise of ‘super apps’ have been at the forefront of driving secular changes in the country, said Roxy Wong, senior portfolio manager, Asia, at Lombard Odier. ‘These super apps are enablers and have disrupted a host of various sectors, from the communication services and consumer sectors, to the financials and healthcare sectors. Furthermore, they have very high barriers of entry, with more than a billion people using these apps daily.’ And at the heart of the digitisation drive is a long-touted darling of disruptive technology – 5G. ‘Last year was the initial year of 5G deployments, with the first compatible phones made available in the second half,’ said Tomasz Godziek, lead portfolio manager of the Technology Disruptors strategy at Bank J. Safra Sarasin. ‘Several telecom operators are speeding up the build-out of new 5G networks, creating opportunities for suppliers. Additionally, 5G adds capacity, helping to supplement 4G, especially in crowded areas. We are significantly exposed to the 5G trend via companies such as Keysight Technologies, Xilinx, Nokia and Analog Devices.’ Meanwhile, Pictet-Digital has 26% exposure to cable and network operators with the intention of benefitting from 5G deployment and the additional revenue it believes is not yet well priced in.
5G offers the potential to revolutionise cloud-based gaming with much quicker download speeds, lower latency and vastly greater potential connections
Digital generation A key digitisation momentum driver is something Pictet calls ‘Generation Hashtag’ – the digital native group born between 1991 and 2000, which represents 34% of today’s population, said Bastianpillai. ‘As it grows up and increases its economic power, demand for digital will become ever greater. As for Generation Z – those born between 1996 and 2010 – 98% of them own a smartphone, 50% are connected online for 10 hours a day, while 70% watch more than two hours of YouTube each day.’ Meanwhile, the potential for what Bastianpillai calls ‘connected things’ – cars, machines, infrastructure, meters and sensors – is virtually limitless. ‘China added 464 million connected things last year. By 2021, there will be more mobile connected things than people. Globally, we expect a similar crossover around 2025. ‘Capturing these opportunities will require new skills – not all mobile operators will be well-suited to make this transition. 6G will follow 5G in further expanding the use cases for machines. By the time 6G services are introduced (likely around 2030), we expect revenue from connected things will have reached 25% of service revenues for leading operators.’ Looking more closely at what 5G will enable, Killian notes e-gaming, which is also receiving a boost amid the current crisis. ‘We believe 5G offers the potential to revolutionise cloud-based gaming with much quicker download speeds, lower latency and vastly greater potential connections,’ she said. ‘It may soon be possible to play games with advanced graphics that currently require high-end consoles or PCs streamed via the internet and played live on a mobile phone.’ Another boon for e-gaming amid lockdown has been the limitations brought on ‘real life’ sports entertainment, with people seeking out gaming for its online accessibility as well as its social nature, said Jason White, lead for global discovery team at Artisan Partners. ‘In recent years, increased player engagement – propelled by more frequent content updates and, to a lesser extent, a shift towards content that is more live services-oriented and more communal in nature, has provided a significant boost to the monetisation efforts of companies that provide digital gaming services,’ he said. The power of eSports The reduction of sporting events has led major sports brands and franchises to enter the virtual world, noted David Lambert, senior portfolio manager of European equity at RBC Global Asset Management. ‘Formula One and Formula E have run motor racing online, while football clubs continue to invest in building e-sports franchises. These are not only being embraced by gamers themselves, but are developing as spectator sports. Investment opportunities will continue to arise as a benefit of this, ranging from game development, gaming equipment to media opportunities around broadcasting such events.’ Another favourite is the mobility theme, with electric vehicles (EVs) set to gradually replace fuel vehicles, according to Yu Chenjun, senior fund manager at Value Partners Group. ‘Automated driving will continue to be upgraded and autonomous driving will be fully realised when the 5G infrastructure is more mature. This will definitely bring a revolution in the transportation industry.’ And China may well be the epicentre for this revolution, with its EV market already the largest and its industry playing a leading role globally, Lombard Odier’s Roxy Wong added. ‘It is now the largest EV market in the world and is expected to ship around 1 million to 1.2 million EVs in 2020. While penetration rate is still very low at roughly 5%, this is expected to double in about three years. EV batteries is an area that may see more technological breakthroughs and the industry will likely grow exponentially in the coming five to 10 years.’ Mobility is also an important part of the JSS Tech Disruptors fund, said Godziek, but they approach it through high-end component providers, as opposed to via automotive manufacturers. ‘This includes firms developing semiconductors focused on the reduction of power consumption (for example, Analog Devices, Rohm), advanced microcontroller producers (STMicroelectronics, etc.) or data-processing semiconductors that are the key enablers of autonomous driving (for example, Xilinx on the LIDAR-front, or NVIDIA on the machine learning inference-front).' E-commerce is another trend to have benefitted markedly during lockdown. ‘It represents a tectonic shift in consumer behaviour and has still fairly low penetration,’ Godziek said. ‘For instance, the e-commerce penetration rate in the US last year was still below 20%. However, we offer a slightly different perspective on the theme. Although we are invested in the world largest e-commerce platform, Amazon, we believe that there will be a massive push towards automated warehouse systems. Therefore, we also invest in companies developing machines that enable warehouse automation, such as the Japanese company Daifuku or German firms Kion and Jungheinrich.’ What’s next for disruptive technology? How do you invest in the highly risky but perhaps highly successful and groundbreaking innovators of tomorrow? At UBS, this is a sub-theme in itself, something the firm calls ‘moonshots’. ‘[These] are basically ambitious or groundbreaking projects undertaken without any expectation of near-term profitability,’ said Sundeep Gantori, equity analyst at UBS Global Wealth Management CIO. ‘For example, cloud computing could have been a moonshot in the 90s, but today it’s a successful mainstream technology. Many moonshots never take off, but if successful, they can be of significant economic value. A few moonshots we addressed in our ‘The future of tech economy’ report include quantum computing, neural interfaces, solid state batteries and fuel cells.’
With its growing economic influence and an apparent willingness to embrace change, Generation X could hold the key to some serious future advances in technology and urban infrastructure development, according to George Saffaye. Saffaye described the Generation X cohort as ‘digital immigrants’ who had successfully lived through and embraced change in the switch from the analogue to digital age. This, coupled with Generation X’s social conscience and awareness, Saffaye said, could encourage the cohort to help develop and embrace new ways of improving everyday life and the environment through technological advancement. “Generation X holds considerable spending power but is also concerned with the social impacts of spending and development. Central to this is the realisation population growth is not sustainable without change. Gen-Xers want to see a solution to this and are willing to be a part of that solution,” he said. “As such, we believe Generation X can influence the adoption of new technologies to help us develop a better lifestyle and improve society. This generation is actually now the most digitally connected. It even uses social media 40 minutes more each week than Millennials and remains very open-minded to further technological and social change.” Mobility innovation According to Saffaye, a key area ripe for development and investment – and input from Generation X – is mobility innovation. This is, essentially, improving transport and communications through emerging technologies such as 5G communications. Centred on the four pillars of connectivity, autonomous vehicles, ride sharing and electrification, mobility innovation is helping disruptive new business models – such as the smartphone-app friendly taxi service Uber – to change the way we use transport and consider vehicle use and urban development, he added. Commenting on likely developments in the future, Saffaye added: “New technologies such as 5G could help revolutionise urban transport, facilitating communications network guided ridesharing in autonomous vehicles. These vehicles could be plugged into a network that is giving real time updates on everything from local travel congestion to available parking spaces.” Saffaye believes there is strong investment potential within this sphere across a range of related sectors. “Opportunities abound in this space and some of the companies operating there look set for a significant period of growth. From the manufacturers of electric vehicles to the designers of safety systems and autonomous sensors and relays there are many individual component companies geared for growth who will likely benefit from the changes ahead. “As new regulation and changing consumer tastes and lifestyle choices boost the use of electric and autonomous vehicles, we believe the electricity supply will also need to change radically, with new ecosystems being built to generate, store, manage and utilise electricity in order to support electric vehicle fleets,” he added. Saffaye also believes this new interconnected world of urban transport could have the power to influence urban planning and move drivers towards more flexible and safer transport use. “If connectivity, ridesharing and EV use grow as we think they might, we could see an end to large-scale car ownership. Even today there are fewer and fewer reasons to own a car. Cars lose value the minute they leave the showroom and spend most of their life parked, redundant and taking up room, which could be used for other things. It is not hard to envisage a future world where no one owns a car and they are simply rented or shared. “Safety is also a critical aspect of future vehicle and transport development. In the US, we currently see fatal road accidents taking place almost every 30 seconds. The adoption of advanced EV technologies such as traffic jam assistance, autonomous emergency braking and in-cabin sensing could save lives and lead to a vast reduction in accidents,” he concluded.
Generation X has the potential to harness and drive forward advances in technology and mobility innovation that could provide some of the most fertile investment opportunities of the future, according to global investment strategist George Saffaye.
Important Information Not for further distribution. This is a financial promotion and is not investment advice. Any views and opinions are those of the investment manager, unless otherwise noted. The value of investment can fall. Investors may not get back the amount invested. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Hong Kong, the issuer of this document is BNY Mellon Investment Management Hong Kong Limited, which is registered with the Securities and Futures Commission (Central Entity Number: AQI762). BNY Mellon Investment Management Hong Kong Limited and any other BNY Mellon entity mentioned are ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. In Singapore this document is issued by BNY Mellon Investment Management Singapore Pte. Limited, Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore (MAS). This advertisement has not been reviewed by the Monetary Authority of Singapore. BNY Mellon Investment Management Hong Kong Limited and any other BNY Mellon entity(ies) mentioned are ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries. If this document is used or distributed in Australia, it is issued by BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865) located at Level 2, 1 Bligh Street, Sydney, NSW 2000. MC296-04-02-2020(6m)
Has the active versus passive debate been given fresh legs by the coronavirus crisis? ‘The debate around active versus passive fund management was in full flow throughout the longest bull market in history,’ said Shreemati Varadarajan, head of investments at AAM Advisory, part of Quilter. ‘While the coronavirus crisis killed off that historic market run, it is yet to extinguish the ongoing heated conversation about which is better – a simple tracker that mimics an index or an actively managed fund.’ The debate has been further fuelled by the exponential growth of the exchange-traded fund (ETF) sector, with the space rapidly becoming flooded with vehicles that have come to form the core of portfolios for their lower fees and ability to stick with bull-market indices, while active managers can underperform. While thematic investing has been around longer than passive investing, the two have been enjoying considerable time in the spotlight over the last few years, especially in Asia. ‘ETF providers like iShares have launched several megatrend ETFs in the last three years focusing on themes like automation, healthcare innovation, ageing population, digitalisation, digital security,’ Varadarajan said. ‘While active fund managers focus on driving alpha by superior stock selection, beta providers have been able to provide tactical alpha within portfolios by providing low-cost thematic solutions.’ Strong performers Simon Godfrey, head of products at EFG Bank Hong Kong, said that the traditional pattern amid a crisis is that more richly valued themes underperform as risk aversion rises and a flight to quality ensues into more established names, which eventually rebound more sustainably as the economy recovers. ‘Equity markets were dominated by a relatively small number of themes going into the current crisis and – to the amazement of many – have continued to outperform strongly,’ he said. ‘Coming out of a crisis, dislocation may have created undervalued opportunities in strongly growing companies, and active managers can overweight such stocks to benefit from the greater dispersion created.’ This rings strongly with a theory put forward by Tomasz Godziek, lead portfolio manager of thematic equities at Bank J. Safra Sarasin, whose doctoral thesis aims to answer the question, ‘in which phases of the macroeconomic environment do active equity portfolio managers tend to outperform passive strategies?’ The well-worn theory goes that active equity managers outperform in periods of market correction because they can react faster to changing market environments and actively adjust their positioning. Also, they can curb portfolio losses by increasing allocation to cash. But Godziek believes that the key reason for active manager outperformance in periods of market correction is a rise in stock return dispersion. Looking at this year’s performance, up until mid-February, equity markets were characterised by the dominance of the growth factor and large caps, as well as a fairly low cross-sectional stock return dispersion. ‘In the first phase of the Covid-19-related correction, which started on February 19, we observed a very common behaviour: panic selling. In this period, dispersion continued to be very low and correlation between single stocks was fairly high,’ Godziek said. ‘However, in the second phase of the correction, dispersion has risen and the market breadth has widened. This has opened a plethora of opportunities for active equity portfolio managers who, after years of underperformance, started outperforming passive strategies.’ He also noted how the expertise of specific trends and themes has become much more important. ‘The complex post-Covid-19 world will combine wide stock return dispersion and less pronounced dominance of large-cap firms. This creates structural tailwinds for skilled, specialised thematic managers who know how to capitalise on new trends such as the emergence of new business models in the healthcare sector, dramatically changing consumer behaviours or the emergence of new computing architectures and paradigms.’
In the first phase of the Covid-19-related correction, which started on February 19, we observed a very common behaviour: panic selling
A complex world The world post-Covid-19 will be an extremely complex one, where investing in broad-based ETFs will no longer be enough, Godziek added. ‘For instance, to invest in cybersecurity, one should no longer invest in an index composed of every company that has a reporting line related to cybersecurity, weighted by market capitalisation. In the wake of Covid-19, only scalable, cloud-based cybersecurity solutions such as Zscaler or Okta will generate true alpha. ‘But specialist knowledge is required to appreciate this trend and identify the right companies. Therefore, we believe that 2020 will be a turning point for the portfolio management industry and will prove the benefits of more active investment approaches.’ Having said that, passive funds will likely retain their audience amid the crisis too. ‘Looking at the development of ETFs so far, we don't think it has reached a tipping point yet,’ said Syed Razif Al-Idid, head, CIMB Private Banking, Singapore. ‘We’ve observed more providers coming to market, offering ever more ETF products. This raises the competition for both incumbent ETF providers, as well as active fund managers, while potentially lowering the total costs for investors.’ Al-Idid has been looking at non-synthetic and non-leveraged ETFs in particular. ‘On a year-to-date basis, we noted those ETFs that have higher or pure exposure to sectors or themes that benefited from work-from-home themes, namely digital economy, cloud computing, gaming, e-commerce etc, have done very well, while those that track the old economy, cyclical sectors such as industrials, financials, and commodities (especially those exposed to the oil and gas segment) have largely lagged in performance.’ For Al-Idid, innovation is allowing the range of ETFs to flourish to cover almost any theme going. But he noted a few considerations for any fund (active or passive) focusing on themes: a) the theme should not be so narrow as to severely constrain the investable universe; and b) the theme should be well-defined – if not, it can end up capturing underlying instruments that do not properly represent the theme. ‘Both may lead to higher, and unnecessary, volatility and not suit clients’ needs,’ he said. ‘We understand a theme can grow or contract, such that the universe of underlying instruments of the ETFs may expand or diminish, and we watch for such developments closely.’ Renewed interest Furthermore, passive vehicles will likely retain their popularity in multi-asset portfolios. Aberdeen Standard Capital (ASC) manages a range of risk-graded multi-asset class portfolios, which primarily use best-of-breed active funds as well as passive funds (with a preference for index trackers as opposed to ETFs) in some asset classes where the active managers struggle to outperform consistently, such as US equities or government bonds, said Jason Day, senior investment manager at ASC. ‘We have seen renewed interest from advisory firms looking to outsource their investment management to ASC as the crisis has sharpened their focus on risk management, diversification and the benefits of a robust asset allocation framework,’ he said. ‘Arguably, long-term returns are driven by the right asset allocation rather than individual manager selection and therefore index funds will continue to have a powerful role in cross-asset portfolios. In a low-growth, low-return world, sensitivities around cost and the ability to add value will only intensify this debate.’ But in the end, it boils down to understanding the unique requirements of each client, Al-Idid said. ‘As advisors, we always aim for our clients to seek proper diversification. One dimension is to find segments that are less correlated to the traditional asset allocation mix of the client. If the client’s needs require exposure to a segment that can be better or cheaply served by an ETF, then an ETF would be more relevant.’