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As themes take hold: the trick is not to pay too much

Thematic investment strategies are easy enough to understand but not so easy to implement. The curse of the thematic manager is the curse of overpaying.

The strong performance of most emerging markets compared with developed markets in recent years has fuelled interest in thematic strategies. The rise of the East and relative decline of the West is, after all, one of the biggest and most obvious themes for pension funds which invest globally.

But when you introduce a requirement to pay only up to ‘fair value’ to get on board with the theme, the path gets much more difficult to find, let alone travel on.


According to Tony Gleason (pictured), New York-based managing director and co-portfolio manager in Neuberger Berman’s global thematic opportunities team, the big risk in thematic investing is to pay too much for growth. It is important to be able to identify undervalued stocks within the theme, he says.

The resulting process for Neuberger Berman, which has about $500 million in its global thematic strategies, involves spending 30 per cent only of the time, or less, on thematic discovery and the rest of the time on deciding what a stock is worth. The team travels extensively looking for investable themes and the stocks to implement them.

The firm, which launched its main thematic fund in 2003, also comes up with some unusual themes.

“Most thematic managers would not sit here and tell you, as I’m doing, that coal is great,” Gleason says. “We own five coal stocks.”

The theme to which coal stocks belong is to be long in the things that China is short of.

While agreeing with the likely growth prospects for emerging markets over the next five to 10 years, Gleason says the Neuberger team looks to contain the portfolio’s risk and still be different. It looks to dissect the drivers of change and work out the best ways to profit from this. The themes have to be investible.

“For instance Cuba is going through a lot of change at the moment,” Gleason says. “They’ve just laid off 80 per cent of all government employees … But how do you play that?”

The big current themes for Neuberger Berman are:

  • lLong on what China is short of – oil, copper, coal, platinum group metals, iron ore and gold supplies remain challenged
  • emerging market consumption – discretionary spending kicks in at $3,000 per capita disposable income; hyper-growth in penetration rates of autos, travel, technology, and even clean-burning natural gas
  • agriculture – demand for food rising and high-quality farmlands are shrinking, requiring improved productivity
  • inflation – the end of cheap oil and potential for monetary debasement
  • manufacturing productivity and technical innovation – higher wages in developing countries driving growth in factory automation; modernisation and industrialisation in emerging markets is a structural trend
  • capital flows from the West to the East – potential for expansion of multiples in Asian stockmarkets; focus on financial services companies with emerging markets exposure; seek beneficiaries of global growth.

The Neuberger thematic strategy holds between 45 and 60 stocks, with a bias, compared with the ASCI ACW Index, towards medium and smaller stocks. It has outperformed the MSCI ACWI by an average of about 5.0 per cent a year after fees since inception (2003) and the MSCI World by 6.5 per cent.

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