In the mid-1990s, while working for another asset management company early in my investment career, I was given the responsibility of managing the global equity segment of a pension fund. Until then I had only run single country portfolios so it was an exciting opportunity for me.
Among the stocks I inherited was a new technology hardware manufacturer. It was increasing sales rapidly but I couldn’t really understand the business fundamentals or its long-term appeal. After some months of strong share price performance I decided to take profits on the stock and sold it.
That, unfortunately, proved a little premature (to say the least). In the following five years, the company’s share price continued on a stratospheric path. While falling heavily in the dot-com bust, it ultimately emerged on the other side to become a mainstay in global equity indices. Today, the firm boasts a market capitalisation of USD200 billion and employs over 70,000 people. The stock I unwisely sold was Cisco Systems, a behemoth of the Internet age.
When it comes to investing in global equities, it pays to become a specialist.
The firms we invest in our thematic portfolios have several distinguishing features. First, thematic companies operate in the most dynamic areas of the economy - sectors whose prospects are being transformed by megatrends.
Second, they are specialists. We concentrate investments in specialist companies whose revenue growth is tied to the evolution of a particular theme, which we measure with our proprietary gauge of thematic “purity”. This is because we are mindful of avoiding the ‘conglomerate discount’ - a valuation penalty that's applied to larger, more complicated businesses.
Third, they have underappreciated cash generation capabilities. Our research shows that the market persistently overestimates how quickly the cash flow of these companies fades: a persistent anomaly that we aim to exploit.
Our ability to identify such distinctive investments stems from our own specialist expertise. Our investment managers are specialists in the themes they manage. They are definitely not generalists but very focused investors. We like to say they “know a lot about little”, combining the role of both analyst and portfolio manager.
Teamwork is crucial, so we ensure each portfolios is overseen by at least two investment managers. A rigorous investment process is essential too. A commonly agreed process provides the arena for clear debate and sound decision making.
What also sets our thematic equity franchise apart is our use of external experts - or Advisory Boards - for each of our single-theme strategies to help us track and manage the evolution of investment themes.
These boards do not dictate the construction of portfolios; rather, they help our investment managers track and assess the long-term course of the theme. We also work with the Copenhagen Institute for Future Studies (CIFS) whose megatrend framework we use as a ‘lens’ through which to analyse the evolution of our investment universe. Click here to read more about our advisory boards in an interview with my colleague, Philippe Rohner.
Over the past several years, we have developed two multiple-theme strategies that we believe can fit in the active equity allocation of institutional portfolios: Pictet Global Thematic Opportunities (GTO) and Pictet Global Environmental Opportunities (GEO). You can find out more about them here.
Our entire thematic process is built on identifying the Ciscos of the future.
Both strategies are benchmark agnostic and genuinely active, with a high active share and high conviction in their approach. Tracking their performance versus a market index in the shorter term is a bit limiting, but in the long term they should benefit from not having to cleave to a backward-looking index of past winners.
Our entire thematic process is built on identifying the Ciscos of the future, and we remain confident that our approach leaves us well placed to outperform the main global equity indices over the long term.
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