Exposure to the right theme is now a bigger driver of equity market outperformance than geography or style, according to a range of portfolio managers.
David Jane, who runs a range of multi-asset funds at Premier Miton said: “It used to be the case that sectors and regions drove things but in a globalised world themes are much more important for the big caps and many of those themes straddle sectors or exclude parts of sectors.”
He said macroeconomic factors tended to impact specific areas such as the oil price, which goes on to impact certain sectors of the stock market, but he said he had less value to add in terms of understanding these factors than he did themes.
Jane said: “Think how the renewable theme straddles energy, industrials or utilities and those with exposure do well when the theme is in favour. Alternatively consider the digital economy and how digital retailers now dominate the retail sector and how there performance has diverged from the historic cyclical nature of that sector.”
Matthew Yeates, deputy chief investment officer at 7IM, said: “It’s a nuance of equity investing generally that people tend to cut their equity exposure by the country of listing."
He said 'UK equity' or 'European equity' often simply meant 'listed in the UK' or 'listed in Europe'.
"When we look at our equity exposure we apply a look through across several different dimensions of sector exposure, factor grouping and in some circumstances these can be thought of as themes," Yeates said.
Among the themes in which he is invested right now is healthcare, a sector which he said gives global exposure that isn’t linked to the performance of individual markets or economies.
Luca Paolini, chief market strategist at Pictet Asset Management went further, believing that in the current market environment, clients seeking a normal level of equity market return would need to pick the right themes.
He said that while long-run average returns for most equity markets tended to be “double digits”, he predicted that in the coming years it would be closer to 7.5 per cent at the index level.
Paolini said: “Within equities, investors should focus more on specific sectors and themes rather than regions. We have identified three industries that should significantly outpace the wider equity market, thanks to structural trends that support their increasing share of corporate revenues and their outsized success at innovation: tech, industrials and healthcare.
"We also expect these sectors to outperform the global equity benchmark by a cumulative 20 per cent or so over the coming five years. By increasing portfolio weighting to these industries, investors will be able to lift their equity returns substantially."
david.thorpe@ft.com
