Thematic investing is the process of identifying powerful macro level trends that can help generate investment outperformance over the long term. Today I’m looking at three themes that I believe could provide superior returns in the future.
Ageing population
The world is ageing at an unprecedented rate as births decline and mortality rates fall. The trend is significantly stronger in more developed countries and the UN predicts that the proportion of people aged 60 and over in those countries will rise to a third of the total by 2050, up from a fifth today.
There’s a clear theme here that’s likely to provide investment opportunities and the most obvious opportunity to come from the ageing population to my mind is an increase in the demand for healthcare.
Indeed, this is a theme that Neil Woodford is capitalising on, with the fund manager driving a large tilt towards the healthcare sector in his equity income fund. Over a third of Woodford’s fund is invested in the healthcare sector, with his top two holdings being AstraZeneca and GlaxoSmithKline. Woodford believes that pharmaceuticals are set to make “further significant advances” in the coming years, and has also invested in several early stage biotechnology companies. Clearly, he sees opportunities being created by the ‘silver economy’.
Defence and cyber defence
With the increased threat of global terrorism, I believe governments will continue to spend on defence and intelligence services and as a result, this could prove to be an attractive theme for investors. Furthermore the sector should prosper no matter who wins the forthcoming US election as both Hillary Clinton and Donald Trump are likely to support a strong military, and defence contractors should benefit.
For this reason I’ve added BAE Systems, one of the largest defence contractors in the world, to my portfolio in the belief that defence spending will drive revenue growth going forward.
Cyber defence is another area that’s likely to prosper as cyber threats become more advanced and companies recognise the importance of establishing adequate cyber protection. With high profile attacks taking place on a regular basis, the cyber security sector is gathering momentum. NCC Group is my preferred cyber security play within the UK and the company has performed well recently with revenue growth of 111% over the last three years.
Online shopping
There’s no doubt the way we shop is changing rapidly and high street footfall is dwindling as consumers now shop from their computers and mobile phones.
While buying online retailers such as ASOS is a direct way to play this theme, there are several other indirect ways of getting involved. Investment ideas could involve packaging companies such as Mondi, DS Smith and Macfarlane Group, postal operators such as Royal Mail Group, or payment providers such as Worldpay Group or Paysafe Group, which could all enjoy the tailwinds of the changes in consumer habits going forward.
Of course, there’s no guarantee that a single company will prosper even if it’s in a sector that’s enjoying the tailwinds of an investment theme and therefore it’s always wise to spread your capital over a handful of companies if you’re taking a thematic approach to investing.
