Back to the future

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This is a sponsored article from Pictet Asset Management.

Hans Peter Portner
Head of Thematic Equities
Pictet Asset Management

In the mid-1990s, I was handed the responsibility of managing the global equity segment of a pension fund. Before then I had only run single-country portfolios, so it was an exciting opportunity.

Among the stocks I inherited was a new technology hardware manufacturer whose sales were rising rapidly. However, I couldn’t really understand its business fundamentals or see its long-term appeal. So, after some months of strong share price performance, I decided to take profits.

The stock was Cisco Systems, whose routers became the building blocks of the new internet age. In the five years after my decision, the company’s share price continued on a stratospheric path before tumbling in the dot-com bust. It did, however, ultimately emerge on the other side to become a mainstay in global equity indices, with a current market capitalisation of US$200 billion and a workforce of over 70,000 employees.

Lessons learnt
From this bruising experience, I learned that in global equity investing, being a specialist is best. Simply being a portfolio constructor and taking top picks from a pool of sector analysts is not enough: You have to be a sector expert and have truly deep stock expertise to deliver clients robust, repeatable outperformance over the long term.

“In global equity investing, being a specialist is best.”

I also learned the world was changing faster than ever, and being on the wrong side of change could have massive investment repercussions. More than ever, what we now describe collectively as megatrends were driving growth in specific areas of the economy.

Exploiting megatrends with expertise
Fast forward two decades and both these aspects — stock expertise and megatrends — have been integral to our thematic equities investment platform at Pictet Asset Management. We now manage over US$40 billion across a range of single-theme and multiple-theme strategies that aim to take advantage of secular growth trends driving key sectors of the global economy.

Pictet Asset Management Thematic Strategies

Source: Pictet Asset Management, 2018

We believe the leading companies in these key growth pockets will be successful in the future and should deliver superior investment returns over the long run. In particular, our research shows that the market persistently overestimates how quickly the cash flow of these companies fades – a persistent anomaly we aim to exploit.

We also focus intently on companies that have strong revenue exposure to a particular theme – what we term ‘purity’. This is because we are mindful of avoiding the conglomerate discount.

The power of concentrated intelligence
Based on my own Cisco experience, our investment managers today are deep specialists in the themes they manage. Combining the roles of analyst and portfolio manager, they are not generalists but highly focused investors who are proud to say they ‘know a lot about a little’.

Teamwork is crucial, so we ensure each theme has at least two managers. A rigorous investment process is also essential: A commonly agreed process creates the space for clear debate and sound decision making.

Hans-Peter Portner speaking to delegates at Pictet Asset Management’s Reaching Higher Ground Conference (London May 2018)

Source: Magnus Arrevad Photography

Taking sound advice on future trends
Another key differentiator of our thematic equity franchise is our use of external experts on advisory boards for each of our single-theme strategies to help us track and manage the evolution of our themes.

The goal of our advisory boards is not to help our investment managers pick stocks but rather to track and debate the long-term course of each theme. We work with the Copenhagen Institute for Future Studies (CIFS) and use their megatrend framework as a lens through which to fine-tune our themes. Click here to find out more about our advisory boards in an interview with my colleague, Philippe Rohner.

Our themes sit at the intersection of megatrends

Source: Pictet Asset Management, Copenhagen Institute for Futures Studies

A strategy with power of conviction
We have developed a comprehensive multiple-theme strategy in recent years that we believe fit in with an active equity allocation: Pictet Global Megatrend Selection (GMS). You can find out more about the strategy and the megatrends it covers here.

“We offer global equity strategies that are demonstrably active and forward-looking.”

The strategy is benchmark agnostic and demonstrably active, supported by a high level of conviction in its approach. Tracking performance against a market index in the shorter term can be slightly limiting, but in the long term it should pay off, given that the strategy is forward-looking and not based on replicating an index of previous winners.

Our entire thematic process is built on the lessons of modern investment history and seeks to identify the Ciscos of the future. We are confident our approach has a strong chance of outperforming the prominent global equity indices over the long term.

This is a sponsored article from Pictet Asset Management.

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