Renaissance - Redefining Research

Investors today are challenged by slower trend economic growth, largely due to a decline in population growth and subdued productivity gains. Meanwhile, climate change and resource depletion will have an increasing impact not only on economic growth but on all of our livelihoods. We believe that a thematic approach not only helps us find the most compelling long-term opportunities but allows us to invest in the trends that have the power to improve societal welfare.

Where there is disruption, there is opportunity, as investors typically underappreciate the duration or magnitude of change. Change leads to shifts in competitive advantage, with weak companies disappearing and great companies adapting. A thematically led investment process narrows our focus to companies that benefit from these changes, enabling us to identify the global companies that can thrive in this era of disruption. In our view there are five key megatrends that will play the most significant role in shaping our futures – ageing, climate change, automation, evolving consumption and digitalisation. We believe, these are the disruptive themes that will define the first half of the 21st century and the outlook for company revenue growth and cashflows.

"In our view there are five key megatrends that will play the most significant role in shaping our futures – ageing, climate change, automation, evolving consumption and digitalisation. We believe, these are the disruptive themes that will define the first half of the 21st century and the outlook for company revenue growth and cashflows."

The benefits of a thematic approach

1. Investing for the long-term

We seek to align our process with the investment time-horizons of our clients, which are often long-term. This necessitates making good decisions and sticking to them, so understanding the direction of travel is critical. An appreciation of what really matters to a business or industry allows us to filter out the noise and to identify mispricing in the market.

2. Differentiated portfolios

Themes allow us to find a different way to utilise the available market data. For example, rather than grouping companies by size or location, grouping them by how they sell or who they sell to may reveal multiple value drivers. This allows us to build conviction around hot spots where the potential for super-normal returns exist.

3. A holistic approach to risk management

The investment industry has developed sophisticated numerical calculations of risk, usually based on an index and a portfolio’s volatility around that index. This has value, but it is not a substitute for common sense or an understanding of what is happening in the world around us. By thinking thematically, we actively consider the broader risks to investment including changing competitive dynamics, environmental or societal factors, governance, or macroeconomic changes.

4. Thematic investment enhances fundamental analysis

Thematic investing is a complement to bottom-up stock analysis, not a substitute. Our global thematic investment process has three stages: idea generation, stock selection, and portfolio construction. Having identified attractive themes, we build a set of companies related to that theme. Thereafter the detailed work of understanding the quality, growth and valuation attributes of the company begins. Only if a business is supported by positive themes, is of the appropriate quality to be a long-term investment and is attractively valued will we invest in it.

5. Stewardship and thematic investment build on each other

Environmental, social, and governance (ESG) analysis is embedded in our analysis of the companies we identify from the themes. ESG factors dovetail with our thematic approach. For example, the need to adapt to climate change and mitigate its effects creates specific opportunities and threats for companies in a range of industries that will be the key driver in their prospects.

However, climate change and the broader consideration of natural capital is fast becoming important to all companies.

We take a long-term thematic approach in combination with an ownership mindset. As a result, we seek to buy companies that are positively aligned with society. When considering a stock, we assess it for impact on E, S and G issues using our traffic light system. We then give the stock an overall ESG rating, indicating to what extent ESG impacts the investment case and valuation.

After all, if a company does not act in the interests of society, society will eventually act against such a company to the detriment of its growth and returns.

Seeing the bigger picture

Our thematic investment philosophy helps us develop perspective by taking a top down view of the world, identifying trends and themes that bring some order to the chaos of a rapidly changing world. We look broadly and horizontally across industry sectors and geographies, combining both macro and micro factors, and adopt a global approach, searching for sustainable change. We believe this gives us a better perspective of the investment opportunities available, and ultimately provides our clients with superior long-term returns.

Above all, it helps us secure tomorrow on behalf of our clients.

For more information on how Sarasin can help your clients, please visit www.sarasinandpartners.com or email sales@sarasin.co.uk.