Megatrends: From Secular Growth Drivers To Investment Themes

Thematic investing

Because megatrends are so disruptive, they can be a crucial source of a company’s long-run revenue and earnings growth. That is why Pictet AM uses megatrends as the basis for each of its thematic equity portfolios. For a trend to qualify as an investible megatrend, it must possess the potential to exert a lasting impact on large parts of the global economy over a time horizon of at least a decade. It must also demonstrate that it can act as a catalyst for long-term growth and give rise to new business opportunities.

Pictet AM has tackled this problem by constructing a megatrends framework in collaboration with experts at the Copenhagen Institute for Futures Studies (CIFS), a global research and advisory firm known for its expertise in the megatrends field. It also draws on the insights provided by its 13 Thematic Advisory Boards. These groups of distinguished industry practitioners, scientists and academics help it monitor megatrends and ensure the continued relevance of its investment themes and their investment opportunity sets.

Megatrend framework

Building on a more than decade-long collaboration with the CIFS, Pictet AM has developed an investible megatrends framework specifically designed to be applicable to thematic equity portfolios. It consists of 21 megatrends organized in six clusters, with some megatrends including additional subtrends.

It uses the megatrend framework to help it define and monitor the themes that form part of its investment universe. Part of that process involves gauging the extent to which a particular megatrend is a long-term source of growth for each of its thematic equity strategies.

 

“Themes

 

sitting

 

at

 

the

 

intersection

of

 

multiple

 

megatrends

 

can

 

provide

predictable

 

value

 

drivers.”

This analysis is conducted within its investment teams with, at times, the involvement of the CIFS and Pictet AM’s thematic advisory boards. Aggregated at the portfolio level, the assessments aim to identify the five to eight most important megatrends for each thematic investment strategy.

Viewed through this prism, it can be seen that Pictet AM’s Global Environmental Opportunities strategy, which invests in companies in clean energy and water, agriculture, forestry and other areas of the environmental value chain, is powered by eight of the megatrends within its framework: virtualization and dematerialization, environmental quality, climate change, resource scarcity, biodiversity and ecosystem services, urbanization, economic growth and focus on health.

Pictet AM then tracks the evolution of each of the megatrends by carefully monitoring selected data points and indicators. While this is not a high-frequency process—the relevant megatrend-related data is usually annual at best—it can serve as a basis for validating the long-term investment thesis for segments of the thematic portfolio, and over time, for making adjustments to the thematic universes.

By analyzing and harnessing megatrends in this way, Pictet AM believes it is better able to identify companies with the most promising investment potential.