A new way to invest in world-changing trends.
Globalization, democratization, the transition towards a knowledge society and the drive towards sustainability – these are just a few of the significant secular shifts that will shape our world, not just in the next few years but over many decades. They’re the “megatrends” that are changing the way we live and the way businesses operate, and they represent long-term growth potential for investors.
There are glimmers of these megatrends everywhere – when a 100 per cent solar-powered plane successfully circumnavigates the globe, when a computer lab uses big data to design climates optimized for growing the best tasting, most nutritious fruits and vegetables, and when genetic medicine sets its sights on cancer and hereditary conditions such as blindness. These breakthroughs raise tantalizing possibilities for aviation, agriculture and health care – and, in today’s interconnected world, they can be shared quickly, built on by others and applied in the real world to rewrite our future.
However, from an investment standpoint, there hasn’t been an easy way to capitalize on global thematic opportunities until recently. The average investor could target specific sectors likely to benefit from megatrends – say, technology or health. But they would often have to rely on indexes made up of companies that have been successful in the past. Over time, these businesses grew to be considered representative of their sector – but they aren’t necessarily the ones best positioned to harness the winds of change.
Instead, it’s often specialist (rather than generalist) and up-and-coming (rather than established) businesses that benefit most from the forces, like megatrends, that create new rules for success.
New solutions invest in the future
Now, Canadian investors can choose new investment solutions that package global thematic opportunities supported by megatrends into funds anyone can access. Insightful academic research can help portfolio managers identify the most promising global patterns and understand the impact they could have on a range of industries. Then those portfolio managers can use their investment expertise to find specific companies that are deeply engaged in activities likely to benefit from those trends, thereby creating a thematic strategy. The more megatrends at play in any area, the more impactful an investment theme becomes.
So, what kinds of megatrends are these new funds exploring? Developed by the Copenhagen Institute for Futures Studies, these examples are attracting the attention of portfolio managers pursuing global thematic opportunities today:
- The increasing connectedness of business processes and economic activity in the network economy
- The ability to meet certain needs without compromising future generations through sustainability
- The move from industrial age to information age, with knowledge as an important economic resource in a knowledge and production society
- Consumers’ focus on intangibles such as ethical or aesthetic appeal, rather than material attributes, resulting in immaterialization
- The transfer of political, economic and cultural power to people through democratization
- Technological progress resulting in a shorter shelf life for products and an increase in acceleration and complexity
- The application of science and knowledge to commercial and industrial processes, supported by
- technology development
- The world’s growing capacity to produce goods and services driven by economic growth
- The rise of freedom of choice and expression of individuality across many societies, resulting in individualization
- The identification of new opportunities to operate sectors more efficiently through commercialization
- The increase in global connectedness and the flow of people, capital, products, services, information,
- technology and culture known as globalization
- The tendency for extremes to grow at the expense of the middle ground through polarization
- The contribution of aging populations, rising wealth and technological advances towards an intensive focus on health
- The widening divide between countries with younger workers and those with an aging and shrinking workforce in a significant demographic development
Prompted by global trend analysis, a portfolio manager may identify a theme where multiple megatrends intersect. Biotech is a common theme among four of these megatrends: technology development, economic growth, a focus on health and demographic development. The portfolio manager can then consult an advisory board made up of scientists, business leaders and academics, who might recommend looking more closely at a problem such as antibiotic-resistant bacteria, which currently contribute to the deaths of 700,000 people every year. By 2050, that number is projected to grow to up to 10 million people with a cost to the global economy of up to US$100 trillion.
The portfolio manager may see that an early-stage biotech company discovered the first new antibiotic in 25 years in 2015 – a medicine that cured 100 per cent of mice infected by a resistant bacteria with a 90 per cent mortality rate. That may drive them to search for similar businesses working towards the same goal, run all the usual due diligence tests on the company’s balance sheet, management’s vision and more – and, if everything checks out, invest in a healthier future and a business poised to benefit from megatrends.
That’s just one small hypothetical example. The key with an approach focused on global thematic opportunities is to diversify across companies, across sectors and across megatrends, brought together in one or more investment themes. That’s because companies, sectors and megatrends will experience accelerated performance at different times. Broad exposure can help to even out returns – something that’s reassuring for even the most committed long-term investors.
Face forward to benefit from megatrends
Investors are often reminded that past performance is not necessarily indicative of future returns – and yet investing has traditionally been backward-looking. We can’t predict the future potential of any one company with certainty, so portfolio managers routinely examine a company’s past performance to decide whether or not to invest. They look at the past-tense decisions the management team has made and the cash flow the company has generated – in addition, of course, to attempting to assess the company’s projected future prospects.
That’s all part of investing in global thematic opportunities as well – but what’s added up front is a layer of analysis that seeks to identify enduring sources of capital growth in the future. Thanks to growth prospects that are being transformed by powerful forces affecting the entire planet, the companies that rise to the surface through this analysis are well positioned to be the winners of tomorrow. They may not even make it into today’s indexes, but they are on a trajectory to dominate in the future, often operating in the most dynamic areas of the global economy and actively exploiting geopolitical, economic, societal and other changes.
Consider how many of yesterday’s top-performing companies have stood the test of time. Just 12 per cent of the Fortune 500 firms in 1955 still made the list in 2017 – 60 out of 500. And, in our fast-paced world, the speed of replacement may be ramping up. One study suggests that half of the firms in today’s S&P 500 Index will be off the list within 10 years. Which companies will replace them? That’s one of the questions a portfolio manager seeking global thematic opportunities wants to answer.
There’s another interesting consequence to investors’ tendency to look back, not forward – and when they do look forward, to look only a few years ahead: the businesses that will lead industries tomorrow are often underpriced by today’s markets. That can be a tremendous advantage to global thematic opportunities portfolio managers, who may be able to find excellent bargains with plenty of room to grow.
Speak with your advisor
For Canadian investors, newly available access to this investing approach is a chance to participate more actively in innovation and capitalize on long-term growth. It’s an opportunity to be part of each megatrend’s trajectory by investing in companies with big ambitions, fresh ideas and lots of upside potential.
However, it’s not for everyone because it generally requires a relatively long investing time horizon of at least five years, and investors should be comfortable with a medium level of volatility. For more information, speak with your advisor, who can help you decide if investing in global thematic opportunities is the right fit for your situation and goals. Learn more about megatrends at https://mega.online and search for mega.online on YouTube.
Exciting developments contributing to megatrends
- Renewable energy is the focus of billions of dollars in government spending, with China leading the way at US$1.9 billion in 2016. By 2040 cleaner forms of energy are predicted to account for up to 40 per cent of the world’s energy supply.
- The average person will have more than six devices connected to the Internet of Things by 2020, and the digital economy is growing three times faster than the global economy.
- About one in 10 patent applications globally were for pharmaceuticals in 2014, and more than 165,000 health apps were available for download in 2017.
- Robots are 300 per cent more efficient and 80 per cent less costly than they were 30 years ago, with 20 to 25 per cent annual growth in the value of the robot market expected in the five years leading up to 2020.
- Up to four billion people could be living under “severe” water stress by 2050, up from 1.2 billion today, a challenge being addressed by innovative businesses focused on water treatment, preventing leakages and increasing irrigation efficiency.
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 https://mega.online/en/articles/ansari-cancer; https://mega.online/en/articles/bainbridge-genetics-video
 The antibiotic is called teixobactin. L.L. Ling, T. Schneider, A.J. Peoples et al, "A new antibiotic kills pathogens without detectable resistance," Nature; 517 (2015): 455–9.
 SG Cross Asset Research Equity, 2014.