Investing with Themes

As a thematic investor we’re often asked the keys to identification of long term investments opportunities. This process is dynamic and continuing and consequently the identification of new investment themes is ongoing.

Although there is no unique ‘black box’ that can be employed, four of the key, and sometimes interacting, factors that help us identify themes over time include:

Technology

The 20th and early 21st centuries have been periods of great technological advancement. This has driven productivity as well as spawning new products and new industries. The enormous development in computing technology is one important example that has enabled productivity growth in a number of areas, including robotics, logistics, retailing, medical technology and pharmaceuticals.

Woolworths is a good example of computer technology being applied to logistics and systems to drive substantial savings. In the digital space we’re seeing companies like REA benefiting from the advertising migration from print to online.

Demographic and Economic Factors

Developing economies such as China have a greater intensity of use of raw materials than mature economies such as the US and Australia as well as greater potential absolute demand. In combination with globalisation and trade, there is the opportunity for strong growth for resource exports. Low cost producers such as BHP, Rio and Woodside are obvious beneficiaries.

By contrast the growth sectors in more mature, developed economies such as Australia are more service related. Health services are one growth industry created by aging demographics. Some Australian companies like CSL and Resmed, possess world class technology and are likely to benefit for some time to come.

Industry Lifecycle

Over time, the process of economic development can be characterised by stages; some industry sectors do well in early stage development, while others develop at later stages. Consequently, the leading sectors in an economy change over time and in order to identify growth sectors, it is important to understand the stage of development as well as the factors that drive change.

Industry Structure

While it is necessary to identify growth sectors, a favourable industry structure is also essential before an attractive investment theme can be demonstrated. Not all growth industries possess suitable industry structures; the key requirement being the opportunity for the benefits of growth to be retained by investors.

Companies with strong industry positions, especially pricing power, and strong industry structures are therefore always desirable.

Bill Gregerson, July 2011