Investing in mega trends like technology, demographics and sustainability involves abandoning the benchmark in the ultimate active portfolio.
Trend investment offers asset owners exposure to key themes in the world today. Rather than ‘going with the flow,’ investing in trends means ‘anticipating the flow’ and is one of the purest forms of active investment, said Mark van der Kroft, chief investment officer fundamental and quant equity at Robeco speaking at FIS Digital 2021.
“It is the ultimate active portfolio,” he said. “We understand these trends and can see themes being played out.”
Investment in trends involves a long-term view and moving away from the benchmark to look at secular changes and different investment opportunities. It is important to leave the benchmark as this is a representation of the past. Trend investment involves trying to find winners and taking out stocks that won’t benefit from secular changes, he said.
Robeco isolates three main mega trends. Transforming technology and digitization; demographic changes and the emergence of new middle classes and what van der Kroft calls “preserving earth,” – picking winners in a deep and expansive sustainability trend.
Preserving earth does not just equate to finding opportunities in climate change; it includes investments that anticipate regulatory change and how the scarcity of resources will play out as well as changes in health. Mega trends are removing barriers to entry, disruptive, creating new products and changing our, and industry, behaviour.
Positive for equity
Trend investing is buoyed by Robeco’s positive outlook for equities in the coming five years. Investors will be rewarded for taking risk, although it will be less skewed to the upside, said van der Kroft. Despite a highly uncertain macro environment characterised by policy unknowns, and the challenge of governments maintaining economic growth whilst crimping personal freedoms to hold down the pandemic, the outlook is supported by technology boosting productivity.
“The environment for the economy is solid,” said van der Kroft, who added that tightening will arrive in response to inflation, but won’t derail the current liquidity in the market.
The long-term nature of trend investment does not make portfolios static. Instead, portfolios are dynamically tilted to benefit as trends evolve and change. For example, smart phones, invented 15 years ago, went on to change the world of advertising, gaming and banking to name a few.
“It is about staying on top of trends and understanding how mega trends can split into sub trends,” he said. Importantly, investors shouldn’t bet on small, thematic risks.
Avoiding losers is a critical element of the jigsaw. Investing in a benchmark already has losers, but by choosing a trend, investors exclude corporates outside trends and narrow their universe. It requires deep research and an analytical edge, alongside outspoken positions, he said. Many investors underestimate long term trends and under-utilise long-term information, not extrapolating its true significance for businesses. It requires the right tools in the box, of which one is sustainability analysis.
“We try to have a very independent analysis from a sustainability perspective,” he says.
Investing in sustainability mega trends requires looking through the noise of the current ESG landscape. It also involves avoiding short term quarterly reports which blur trend investors’ view.
“Stick to your guns and believe in what you do,” he said.
Trend investment is different to factor investment. In response to a question from Fred Nieuwland, chief investment officer, Mars Incorporated, van der Kroft explained that factor investing is tied to looking backwards to see how value, momentum or size trends determine premia that lead to out- performance. Most factor investment is based on past results, but trend investment doesn’t take the benchmark as the starting point and is more focused on quality and growth.
Nieuwland said trend investment can be somtimes difficult because mega trends conflict with each other. For example, demographic trends titled towards consumption by emerging middle classes in developing economies conflicts with sustainable world trends.