Investing for growth: It's trendy to spot the themes
Fund managers such as Sarasin, American Phoenix and GT Global led the way in launching such funds in the UK, and have been followed by Perpetual and Guinness Flight.
These fund managers try to track trends that have worldwide implications, rather than just local. Such trends include ageing populations, rapid growth of new technology, restrictions in the welfare state and the breakdown of world trade barriers.
"A theme is something that transcends countries, borders, industries and sectors," says Peter Winders of American Phoenix. According to GT Global, the trends combine to offer investment themes that affect each other. So investment opportunities created by new technology will not necessarily be limited to technology stocks, but could be in financial services or healthcare, for instance. By the same token, investment opportunities for health companies are likely also to be beneficial for new technology.
If it all sounds complicated, then these managers have statistics to support their cases. A study conducted by Ned Davis, a US research group, on share performance between 1980 and 1993 found that during that period the wrong share picked in the wrong sector would have grown by just 4.5 per cent a year. The right stock in the wrong sector would have grown 15 per cent, but the wrong stock in the right sector would have grown by 19.8 per cent.
What fund managers aim to do is pick the right sector by using complicated trend analysis data, and then pick the right stocks within that sector. "It's much more important to us to be in the right sectors than in the right stocks. It is themes that will get you in the right stocks," says Mr Winders. "Before we start thinking about a country, sector or industry, we look at what themes happen to be in play, such as the ageing population, or moves to outsourcing. The aim is to be in the sectors which are moving forward."
By their very nature such funds are for those who seek growth opportunities over the longer term. Themes identified by fund managers are likely to last for 10 to 20 years and consequently the aim is to get in on the ground floor before too many people cotton on and push up the share prices.
This is what has happened in the biotechnology field where investors hoping to make a killing have forced many stocks up in price long before companies actually have products to sell. Investors are buying into an expectation of future profits but with the high risk biotechnology arena, many are likely to be disappointed. Global theme funds aim to reduce the risks by buying stocks that will benefit from future events, rather than punting on companies that may or may not make it big.
Results from many of the funds have proved disappointing so far. But with many of the themes not expected to have major effects for many years, that is perhaps not surprising.
While backing such trends could prove to be lucrative, the funds are only suited to investors prepared to wait it out according to Graham Bates, an independent financial adviser. "Specialist sectors such as technology and healthcare are best suited to someone who is prepared to take a long term view," he says. "Although there is greater volatility with investment in smaller and specialised companies, the growth potential is high. This type of investment would suit younger people who want to invest a small to medium-sized lump sum and who have plenty of time to watch the investment grow."
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