investment viewpoints

mapping complexity – how to identify sustainable investment themes.

mapping complexity – how to identify sustainable investment themes.

A series of disruptive forces are changing the world as we know it. In the midst of this complexity, the best route to a long-term horizon is built on sustainability.

Attendees of the annual finance fair 'Finanz '19' in Zurich heard from leading industry experts - Dr. Stephan Sigrist, together with portfolio managers Johan Utterman and Juan Mendoza - on the mega trends which are set to shape our economic and social outcomes.

Dr. Sigrist - founder of leading interdisciplinary think tank W.I.R.E - explained how investors can narrow their focus when it comes to identifying long-term drivers of change. Political and economic uncertainty, together with the rapid pace of technological advancements, makes for a potentially chaotic investment landscape. This complexity generates ideas and opportunities for investors but only a fraction will prove sustainable, he said. 

Demographic changes is one of the five dominant mega trends, for example. Dr. Sigrist noted that the world population is growing by around 1.1% a year, or around 83 million people annually. As the population grows, so will the average age of the individual, giving way to an ageing society. 

Between 2000 and 2050, the proportion of people who are older than 60 is expected to double, from 11% to 22%, or from around 600 million to 2 billion. It took France more than 100 years to see a doubling in the number of citizens aged 65 and over, while countries like China and Brazil are expected to see the same demographic shift within 25 years. 

Johan Utterman, portfolio manager of the LO Funds – Golden Age fund explained how this trend is translated into an investment theme. The fund aims to capitalize on this emerging theme and so invests in a range of companies which help people to live longer, healthier, more financially-secure lives. Companies which are positioned to meet the needs of this consumer class stand to grow at a faster rate than the broader market and generate superior returns. 

This trend can also be taken in context of another mega trend – the digital revolution – in order to properly anticipate the direction it may take from an investment perspective. Utterman acknowledged that one consequence of an ageing population is that healthcare costs inevitably spike. Technological advancements can help alleviate the pressure of this demographic change. 

Robotic surgery is in its infancy but it has enormous potential. Johan noted that the smaller incisions, together with the greater dexterity afforded by robotics, shortens a patient’s recovery time. This is beneficial to the patient but it also reduces rehabilitation costs for hospitals. Equally, telehealth advancements and other forms of remote monitoring can allow a patient to recover at home, as opposed to remaining in hospital. 

Dr. Sigrist also noted that it is low and middle income counties which are set to experience the most rapid and dramatic demographic changes. Another expression of this change concerns the rapid expansion of the middle class in Asia. 

Juan Mendoza, portfolio manager of the LO Funds – Global Prestige fund explained how the early manifestation of this change has already influenced his investment strategy. He observed that a decade ago, the focus of a thematic fund like Prestige – which invests in established companies that enjoy a prestigious brand – may have been the luxury sector. The expansion of the middle class in Asia, and the accompanying rise in associated discretionary spending, has been such that it has opened up new areas of focus. This investment theme is another which is to a degree shaped by the potential of the 'digital revolution'. 

For example, a defining characteristic of this consumer class is a greater focus on convenience. Leading premium food and drink brands are already forging partnerships in Asia that are designed to disrupt conventional distribution channels and capitalize on this growth opportunity. 

Mendoza also noted that this burgeoning middle class is driving innovation and development when it comes to electric vehicles. In China especially, technology associated with clean air is in the midst of a boom as this consumer class uses its discretionary spending capabilities to combat the pressing issue of pollution.

The panel convened on the issue of complexity and how the sheer number of active trends and developments can prove overwhelming to an investor aiming to build a stable, long term strategy. It is our view that there are five mega trends which we believe will shape our economic and social outcomes: demographics, climate change, natural resources, digital revolution and inequality. Sustainability is the common theme which unites these trends and underscores their long-term impact.

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