Deep Dive: Energy Transition And Healthcare Stocks Dominate Thematic Space

According to Sophie Burke-Murphy, investment director at Featherstone, the most prominent themes are those centred around social, demographic and technological change.

"The world's ageing population, advances in technology and environmental protection are three examples of dominant themes that are having a significant impact on our world today, and are likely to continue having an impact in the years ahead. It is worth noting that often, themes do not exist in isolation," she said.

Burke-Murphy explained that as traditional benchmark investing tended to focus on success stories of the past, it often failed to incorporate emerging trends and forward looking perspectives.

Thematic investing aims to identify and profit from long-term structural trends shaping the world, she said, adding that it offered a "more logical approach to building a portfolio" than drilling down to find merits of economies, bound by geography and company size.

A systematic approach to thematics 

Energy transition

ESG and sustainability have dominated the thematic space, and with Russia's invasion of Ukraine greatly accelerating the push for the development of renewable and clean energy, associated sub-themes are set to get a boost.

2022 has been a year of market headwinds, investors have also looked to haven assets somewhat insulated from economic pressures.

According to Amanda O'Toole, fund manager at AXA Investment Managers, companies involved in the energy transition today have a far better outlook now than they did nine months ago.

"Partly, this is due to the long-term earnings growth being supported by policy, with Europe committing extra money to renewables," she said. 

"But it is also because the structural move to clean energy sources continues apace, now with the added incentive of securing energy independence and demand proving extremely resilient."

The AXA ACT Clean Economy strategy is currently betting on US renewables, with O'Toole citing its capacity for new solar in regions like Ohio, as well as its insulation from supply chain issues hampering production in Europe.

Deep Dive: Investment opportunities in energy transition

"Arizona-based First Solar, which manufactures and operates many of the world's largest grid-connected PV (photovoltaic) power plants, is a stock we particularly like," she added.

"It is a leader in the field with significant competitive advantages, pricing power, an order book with a backlog of around two years, and a strong fundamental long-term earnings outlook."

Not every sector involved in the transition has this outlook, however. O'Toole explained that she had been cautious about the autos space, specifically electric vehicles, adding that despite being supported by global policy, electric vehicles continued to face supply challenges, and that associated cost inflation would eventually be passed to the price of cars.

Fabiana Fedeli CIO for equities at M&G agreed, adding that amid market headwinds, the firm had advised its equity clients to look to long-term themes set to prevail "independent of the near-term outcomes", such as infrastructure and the low-carbon ecosystem.

Fedeli said that narrower themes were far more likely to boom and bust, adding that low carbon was one such broader avenue investors could take.

WisdomTree: Thematic fund flows slow in H1 2022

"There is a large ecosystem of companies that service and support the renewables industry, as well as companies that have learned to embed energy efficiency in their operations, hence contributing to decarbonisation," she said.

"Some of these are incumbent players in traditional industries that have adapted and evolved. Such transformation may be going unnoticed at the early stages, and these are by far the most exciting investment opportunities within the low-carbon theme."

Healthcare

According to Featherstone's Burke-Murphy, another theme in spotlight is healthcare, often considered to be less volatile in times of stress, and one available to investors in different guises.

"We own the Baillie Gifford Health Innovation fund, which gives exposure to the exciting innovative elements of healthcare but will show some volatility as it is essentially a growth story," she said. 

"We also own the multi-cap Polar Healthcare Opportunities fund which provides broader, historically less volatile exposure to healthcare."

Partner insight: How to get the best from thematic ETFs

Terence Moll, head of investment strategy and ESG at 7IM, echoed Burke-Murphy, adding that large healthcare stocks were generally defensive, falling less than the market when times are hard.

"Most of the world is ageing rapidly, implying huge long-term demand for healthcare in both rich and poor countries. The big healthcare companies are not priced with this growth potential in mind," he said.

Moll emphasised the importance of identifying solid investment themes - long-term drivers of economies or companies that investors may not fully appreciate yet.

"Once we have found a theme, we look for sensible ways of implementing it.

"We prefer low cost products with long investment records that we can understand and analyse in detail. Some good healthcare funds, for example, have track records of a decade or more," he said.

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