Thematic investing and the role of accountants
Thematic investing is a term you’re not likely to hear outside the sphere of asset and wealth management, but it’s growing popularity, expressed in billions of dollars, makes its influence and impact far reaching.
The global market for thematic investing grew by 77% in 2020 to €572bn of assets worldwide, after growing at an annual rate of 37% since 2018, according to Axa Investment Managers.
But what exactly is thematic investing?
Essentially, it’s about investing in global trends and it’s been going on in one form or another for a long time. Amid the industrial revolution investors would have made (and lost) money investing in themes such as modern transport and new technology — railroads, coal mining, motor cars and oil exploration.
These days, investment companies (asset managers) and private banks (wealth managers) will often create a framework for thematic investing by initially identifying megatrends, such as ESG (environmental, social and governance), demographics, digitalisation, new technologies, and urbanisation.
These might then be broken down into more bite-sized themes that begin to more closely resemble sectors or specific problems to solve, such as health science, ageing populations, renewable energy, electric vehicles, overpopulation, and so on.
For example, BlackRock identifies five key megatrends:
- Technological breakthrough
- Demographics and social change
- Rapid urbanisation
- Climate change and resource scarcity
- Emerging global wealth
The investment company has created several thematic investment funds to target these trends and sectors, focusing on fintech, next generation technology, sustainable energy, the future of transport, nutrition and the circular economy.
Goldman Sachs Asset Management views millennial consumer habits and preferences as a trend and has created a fund to target what it calls the ‘world’s largest and wealthiest generation’.
iShares, which provides index tracking funds, or ETFs (exchange traded funds), highlights three megatrends to look out for in 2022:
- Digital transformation to intensify via the cloud, 5G and cybersecurity
- Investment in automation, including robotics and artificial intelligence (AI), to grow in response to ongoing supply chain bottlenecks and wage inflation
- Immunology as a range of next-gen oncological therapeutics coming up for approval and enabling more targeted cancer treatment
Amid the pandemic thematic funds thrived due to the fact that Covid-19 highlighted key areas in need of innovation and investment, such as healthcare, supply chains, e-commerce, and remote working.
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But what does this mean for accountants?
The ultimate purpose of a framework of themes is to invest capital in companies that will drive these trends and provide a return on investment.
With more and more money flowing into these themes, there is a lot at stake for the companies vying to be beneficiaries. And when it gets down to the nuts and bolts of whether a company is a good and safe bet, asset and wealth managers will do their due diligence.
Many investment companies will perform ‘bottom-up’ research, which involves researching a specific stock (business) to determine attractiveness and risk levels. Bottom-up investing requires looking at factors like a business’s overall financial health, financial statements, products and services, supply and demand.
This can involve multiple meetings with a company’s key employees and leaders to understand how it operates, past performance, strategy, future growth, debts, ownership structure, culture — before investing, they may want to take a really close look ‘under the hood’.
If during this research and analysis process they find, for example, accounting irregularities on the financial statements, or inconsistency between past performance and growth forecasts, it can throw up serious red flags. Therefore, good financial accounting – providing confidence via water-tight statements and reporting – is integral to a business’s overall investment attractiveness.
Proving strong governance and corporate responsibility should also be key determinants for investors and is another area in which the finance department plays a vital role by ensuring a business is operating legally and within the regulations. Gaining trust is crucial, particularly in the wake of the global financial crisis and the various accounting scandals that have surfaced over the past few decades.
These days, finance’s responsibilities extend beyond finance, with accountants often tasked with sustainability reporting, which focuses on the disclosure of non-financial information about a business’s performance to external stakeholders, such as capital holders, creditors, authorities, suppliers, customers and potential investors.
Very contemporary examples of non-financial reporting relates to climate change and diversity and inclusion. Finance departments might be tasked with collaborating across a business to produce reports on environmental performance or inclusion in the recruitment process.
In a world in which data is king, harnessing it as much as possible from across a business to provide a powerful picture of an attractive potential investment is something accountants will certainly be required to increasingly help with.
Author: Neil Johnson, journalist
This article was first published in Student Accountant in March 2022