Investment ideas for the next big trend

As indices and fund managers become increasingly correlated to ‘big tech’, we look at what trends can offer investors diversification, without compromising growth

Article updated: 28 August 2020 9:00am Author: William Sobczak

Despite the uncertainty and volatility of 2020, one thing that has remained constant has been the long-term trend of technology stocks’ outperformance. Looking over the past ten years, technology associated companies have been some of the strongest in protecting capital during downturns, while dramatically outperforming on the upside. As a result the indices (and fund managers’ portfolios) are increasingly correlated to ‘big tech’.

However, there are question marks surrounding how sustainable the outperformance of technology is, and as such we think it may be timely to have a look at diversifying away from this growth area.

At Kepler Trust Intelligence we recently examined two broad themes, and two trusts, that offer diversification away from tech, and still have the potential for growth.

Healthcare

Healthcare, as a long-term growth theme, offers an interesting investment prospect. Alongside benefitting from innovation and R&D spend, the convergence of big data, technology and AI could mean the next decade is truly transformative. Within healthcare, two large underlying trends are apparent: that of ageing populations in the West (demographics), and the rise of the middle classes in emerging markets. Both trends are likely to drive the requirement of healthcare, and COVID-19 has only reinforced that need.

International Biotechnology Trust (IBT) is an example of a trust offering exposure to the broad trend. IBT invests globally in biotechnology companies that provide solutions to unmet medical needs. Although a specialist area, it’s one that has continued to grow throughout the pandemic. The trust invests in both listed and unlisted companies, meaning that they often can offer exposure to unique and otherwise inaccessible growth opportunities for investors. IBT also pays a dividend of 4% of NAV each year from capital, which could be very interesting for investors seeking an income which is not correlated to the ‘usual suspects’ in the FTSE

The end of carbon

Another long term growth area is the end of carbon and the increasing use of renewables. Encompassing a wide array of opportunities, significant investment is required to move the global economy away from fossil fuels. Despite COVID-19, Q1 2020 was the first time that more than 50% of German energy needs were met by renewables. It was also during the same period that Tesla’s all-electric car was the best-selling car in the US.

Impax Environmental Markets (IEM) is an example of a trust that looks to take advantage of this long-term trend. The core investment thesis is that the global economy needed to transition from a depletive economic model, to a sustainable one in which growth is achieved with improved social and environmental outcomes. COVID-19 has actually sped up these changes, as economies look to ‘build back better’. The portfolio has a focus on small- and mid-cap companies meaning that IEM offers exposures that are unlikely to be found in generalist global funds or trusts. With strong performance from the manager, and a good alpha score over five years, in our view IEM should be a strong candidate for long-term investors looking for diversified growth.

Note: International Biotechnology Trust and Impax Environmental Markets are clients of Kepler Partners.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

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William Sobczak

Investment Trust Analyst, Kepler Partners

William joined Kepler Partners in February 2018 as an investment trust analyst. Prior to joining, William graduated from the University of Western Australia, with a BSc in Psychology.