Would you invest in a collection of stocks based on the theme “Fighting Fat”? How about “Cyber Security”? Or the idea of “No Glass Ceilings,” focused on companies with women CEOs?
Buying stocks based on these and other themes that tap into where consumers and the corporate world might be headed can lead to impressive profits.
A few asset-management companies are offering theme portfolios. For example, Invesco offers thematic exchange-traded funds, including clean energy and global agriculture…Global X offers an ETF focused on social media…Robo-Stox offers one focused on global robotics and automation…and AllianceBernstein has a Global Thematic Growth Fund that focuses on seven themes, including gene-based therapies and the evolution of the Web.
But it is a three-year-old online brokerage called Motif Investing that is offering the greatest variety of theme portfolios—including the three mentioned at the top of this article and more than 100 others, ranging from “World of Sports” and “Child’s Play” (child-focused products) to “Kings of K Street” (companies that spend the most on lobbyists, who tend to have offices on K Street in Washington, DC) and “High Spirits” (alcoholic beverages). Motif Investing also helps individual investors create their own thematic portfolios that others can invest in as well, including “Pay It Forward” (digital-payment services), “Everything Coca-Cola” (distributors of the beverage company’s brands) and “Best Companies to Work For.”
Motif Investing portfolios have attracted some notable investors, including former Securities & Exchange Commission chairman Arthur Levitt and ex-Bank of America brokerage boss Sallie Krawcheck. Both also are on Motif’s board of directors.
To learn more about the thinking behind thematic investing, Bottom Line/Personal spoke with Hardeep Walia, CEO of Motif Investing…
At Motif, we identify themes—driven by economics, politics, technology, the environment, culture and/or demographics—that we believe will catch on in the next few years. We have come up with 136 of these themes (I call them ”motifs”) and created portfolios around them. Each motif typically holds between 15 and 30 stocks. Unlike many traditional ETFs, which give the biggest companies the greatest weight in a portfolio, we give the greatest weight to those that most strongly fit the theme.
Example:In our Shale Gas motif, companies that are heavily involved in the Marcellus shale region, which includes parts of Pennsylvania and West Virginia, are given the biggest weighting because of the huge potential for natural gas production there.
We seek the greatest opportunities not just in the US but in the world.
Example:We have a motif called China Internet. China already is the biggest Internet market in the world, with 600 million users, but less than half of households have Internet access. Over the past year, the portfolio gained 80%, compared with 20% for the Standard & Poor’s 500 stock index.*
Thematic strategies are designed for an increasingly global and complex world, in which the best investment opportunities often span different sectors, industries, market capitalizations and countries at the same time.
For instance, take our motif called Robotic Revolution. With advancements in automation technology, companies across multiple industries are realizing that they can employ robots not just on a factory floor but in unexpected and groundbreaking ways to improve safety and production. And they are calling on companies of many different sizes to help. The 20-stock motif includes a micro-cap (the Israeli company Mazor Robotics, which provides guidance technology for spinal operations), a small-cap (California military drone maker AeroVironment) and a large-cap (FMC Technologies, a Texas-based provider of remotely operated vehicles for deep-water oil exploration). The motif’s one-year performance: 21%.
Thematic investing does have drawbacks. Although we have some low-volatility portfolios, various Motif Investing portfolios are likely to be much more volatile than a broad ETF or mutual fund or even industry sector fund. And although we have portfolios designed to do well in bear markets, many themes can fall way out of favor when the market is going through a bearish phase. Even powerful themes tend to develop in fits and starts.
Example:We developed a portfolio of mining companies called Dr. Copper, based on the strong hunger for that metal in developing economies. But China’s slowdown in economic growth has pushed the portfolio down by 1% over the past year.
Because of these risks, you may want to use thematic investing as a satellite strategy, putting a small portion of your overall assets into thematic stocks or funds in hopes of boosting overall long-term returns.
Follow these guidelines for successful thematic investing…
Make sure the theme has massive scale and potential. Example:Corporations are just beginning to address the lucrative opportunities in innovative medical treatments for the chronically overweight. The latest FDA-approved weight-loss drug, Qysmia, is expected to reach $2 billion in annual sales by 2017. For the Fighting Fat motif, we picked 17 stocks, including Vivus (which makes Qysmia) and Novo Nordisk (which makes products to treat diabetes). The motif’s performance: 1%.
See if the theme still is new enough that it is misunderstood or underappreciated by the market. This allows you to pick up stocks with big potential while they still are cheap. While a theme doesn’t need to be generating peak profits for companies, it should start to play out over the next five years.
Example: Hacking incidents have sent corporations rushing to ratchet up spending on computer security, creating a new global industry for security companies. You have never heard of many of the companies in the Cyber Security motif, including data-protection software and security providers such as Imperva and Proofpoint, but I believe you will. The motif’s performance: 11%.
A theme really is just a filter, narrowing the universe of possible investments down to a manageable number of stocks that can be closely examined. After choosing a theme, identify industries likely to reap benefits from the theme…then find the most dominant, or “best-of-breed,” companies within those industries.
Example: There now are 23 female CEOs of Fortune 500 companies, up from just two in 2000. Research shows that when more women hold senior or board positions, companies see boosts in profitability, return on equity and overall organizational effectiveness. We followed this No Glass Ceilings motif into some diverse and surprising areas, including defense (CEO Marillyn Hewson at Lockheed Martin)…banking (Beth Mooney at KeyCorp)…and chemicals (Ellen J. Kullman at DuPont). The motif’s performance: 16%.
*All fund performance figures are for one year through April 30, 2014.
