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London Fashion Week provides a timely reminder of the importance of distinguishing long-term investment themes from passing financial fashions.
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The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.
London Fashion Week is a timely reminder of the importance of assessing fads and fashion in the world of investments and fund selection.
Just as it is important to distinguish enduring clothing styles and trends from temporary fads, so it is important to separate long-term investment themes from passing financial fashions.
Demographic change, such as an ageing population, is undoubtedly a powerful enduring trend impacting investments, whereas robotics may be a passing fad. So it is in the world of fashion – one does not want to mistake flares for a long-term winning style.
It’s essential to have the investing tools and robust research framework to ascertain whether an investment theme is viable for the long term and how to best harness it. Broadly speaking we, the Manager Selection team at Barclays, think of thematic funds – those which invest according to a particular theme rather than focus on a particular geographical market – as fitting into three buckets. These buckets are: long-term durable themes, niche shorter term themes, and those that we think are fleeting and lacking in substance – the shoulder pads of the funds universe, if you will.
Separating themes into these groups is not straightforward and relies on the skills of manager research teams to interrogate fund managers and read around the subject, in order to sort the metaphoric ripped jeans from the drainpipes.
Making the most of the relatable
Longer term themes are recognisable and easy to relate to. Examples include an ageing population or digitalisation. There is little debate that these are long-lived and powerful trends. iShares have an offering in both these areas and dub them ‘megatrends’. More niche trends include alternative energy or water – they have a relatively narrow number of potential constituents and may be more affected by economic cycles.
Examples of funds that we rate here are BlackRock Sustainable Energy or Polar Capital Global Technology. As for less substantive trends, examples might include those raft of themes focused on niche technologies - such as FinTech, MedTech and RegTech or Cryptocurrency. In contrast to other themes, they may not be easy to understand nor positioned for consistently strong growth.
In order to assess whether we positively rate a thematic fund manager, there are a number of things we consider. Firstly, whether the fund or theme is viable – is there a clear definition of the kind of companies which qualify for investment in the fund and is the number of such companies actually large enough and sufficiently diverse?
Finding the balance on niche ideas
On the flipside, we need to be sure that the range of companies a fund might invest in is not so large that a theme can’t be pursued in a focused manner. Many themes are often at an early stage and so the firms that operate in these industries may be small, loss-making and may not have good corporate governance.
To decide whether we think a manager may be successful or not – as with any manager, thematic or not – we ascertain the strengths and weaknesses of the parent company, the team, the investment philosophy and process, and the fund performance.
For example, we make sure the firm is in good financial health and confirm which of its strategies it’s committed to; we check that the investment process has suitable risk controls and research templates; and consider if the market opportunities the fund manager is trying to exploit are actually viable.
We want to see several key traits from our preferred thematic funds. A good understanding of the theme by the fund management team, as well as making sure that the fund is not a distraction from the team looking after any more mainstream, non-thematic funds they’re also responsible for at their firm.
We then use this information to decide whether we want to include the fund in any of the investment products or client offerings we manage for our clients, including the Barclays Funds List. Smart Investor offers a wide range of funds, and our Barclays Funds List may help you to narrow down the wide range available to invest in. These funds are selected by Barclays investment specialists and, based on our research, they’re the funds that have built solid reputations and established sound investment processes.
Look for those with specialist experience
Rare as it may be, ideally the fund manager will have some years of experience in running the thematic fund and have built up a successful track record. Given that, by definition, companies that meet these themes are experiencing superior levels of growth, we want to see evidence that fund managers actually understand the true nature of the companies they’ve invested in and make sure that they’re not just being drawn into blue-sky stories of the reasons for their success.
A good example is within alternative energy – one might have expected wind turbine firms to have enjoyed tremendous growth and profits, yet this has not been the case. Thematic firms will often be new businesses and may be loss-making, in which case we want managers to be very clear on the path to profits and viability.
Finally, assessing performance success can be difficult as there often isn’t an index relevant to the fund’s themes. If one does exist, there is often a difference between what the index providers (such as FTSE, MSCI etc.) think should be included and the view of a fund manager.
As such, working out whether a manager is doing a good job can be challenging. Partial solutions include comparing a fund to its thematic peers – although there may be very few of these – or seeing how a fund has performed relative to its own stock universe – in other words, is there evidence the manager has been successful in selecting stocks within the theme.
By conducting this thorough analysis, we aim to weed out the managers that will be strutting the funds catwalk for many years to come rather than becoming an out-moded has-been of fund fashion.
We don’t offer personal investment advice so if you’re unsure you should seek that independently.
Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.
All of these investments can fall in value as well rise; you may get back less than you invest.
These are our current opinions but the future, as ever, is uncertain and outcomes may differ.
The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances. Smart Investor doesn’t offer personal financial advice. If you’re not sure about investing, seek independent advice.
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