The pandemic changed everything... and changed everything quickly. It was March 13th of 2020 that the world shut down and a new "normal" was created for how we live, work, travel, shop and learn. Investing in 2020 became defined by themes and, as a result, assets under management (AUM) in thematic funds grew by $72.5 billion in 2020 as retail investors and professionals looked for common sense ways to position their portfolios in these unprecedented times.
(1)
The development of Exchange Traded Funds (ETFs) in the 1990s provided the perfect delivery vehicle for investors large and small who wanted easier and quicker exposure to popular themes focused on long-term, societal trends such as disruptive technologies, climate change, or shifting consumer behaviors.
(2) AT WT Wealth Management, we were an early adopter of thematic investing, using thematic ETFs since 2014 to position our clients in areas that we feel will generate above-market returns over the long term. And we continue to believe that the use of themes for navigating different market conditions will be a prominent strategy over the coming decade.
What is Thematic Investing and How is it Different?
But let's first take a step back to define what we're talking about. Thematic investing involves investing in a portfolio that gathers together a collection of companies from certain, specific industries centered around a theme. Typically, themes are well-known and are best characterized as powerful and secular shifts, triggered primarily by new technology, innovation and the resulting consumer adoption. Themes might be based on a concept such as robotics, drone technology, driverless car technology, businesses frequented by millennials or just about any other innovation an investor could imagine.
(3)
A key benefit of thematic investing is a less-constrained investment universe. While traditional investing still largely adheres to narrow country boundaries or sector classifications, thematic investors view companies through the prism of either winning or losing regarding their respective theme. This typically fosters a long-term investment approach focused on steady growth and consumer adoption.
With thematic investing, the investor becomes part of the story as they very well could be using and adopting a large percentage of the products and services these companies offer. Investors with strong convictions about the future economic success of a theme (and/or its social or environmental benefits) are able to follow their convictions by channeling their investments.
Thematic Breakaway
There were several prominent themes that dramatically outperformed the S&P 500 in 2020, including: cloud computing, work-from-home, shop-from-home, date-from-home and even learn-from-home technologies. Investors in these themes experienced generous returns fueled by rapid revenue growth as a result of widespread consumer adoption of these new and developing innovations.
A number of previously less familiar stocks have now become household names: the video-conferencing company Zoom, dating app Match.com, fitness company Peloton, payment processors PayPal and Square, and document management firm DocuSign – all of which had breakout years in 2020.
For 2021, as a result of the Biden Presidency we have already witnessed substantial dollars flowing into new themes like clean and renewable energy, electric vehicles, battery technology and infrastructure.
Popping the Asset-Bubble Fear
Strong performance often prompts a critical question, and 2021 will be no exception: Is this a bubble? The term "asset bubble" describes instances when broad markets or specific companies reach price levels or valuations driven by irrational sentiments or that become dislocated from realistic expectations of future value.
While many themes significantly outperformed the broad markets in 2020, that doesn't necessarily mean they are overvalued. In fact, many of the best-performing themes posted strong revenue and earnings growth in 2020. Outside of a few outliers, there is little evidence that an asset bubble is a systemic issue based on thematic performance in 2020. That being said, risk remains a core element of any investment approach.
Risks to Watch
At WT Wealth Management, we always try to be cognizant of risks and watch for instances where valuations and expectations become unhinged. After the decoupling of many themes with the broader market in 2020, risk will most likely stem from behavioral or policy catalysts in 2021. Will consumers return to their prior Covid-19 life and abandon work-from-home, workout-from-home, shop-from-home and even streaming entertainment-from-home?
Several themes appear vulnerable to shifts in investor sentiment and behavioral biases. Positive developments on the vaccine front have revived hopes of economic re-openings. The reopening narrative may not adversely impact the long-term expectations of many themes, but investors may temporarily shift their interest to companies that were hard hit by the pandemic and are primed for a rapid earnings rebound. Such a sentiment-based move could produce a short-lived recovery trade followed by a potential return to companies and themes that define how we will live under the new normal.
Conclusions
As we entered 2020, no one predicted, or even imagined, the impact of the coronavirus pandemic. Unforeseen events frequently weigh on the behavior of financial markets, and investors. However, these same unexpected twists also offer opportunities.
While headline economic growth and asset prices often recover from economic shocks rapidly, certain industries like travel or entertainment may be slow to recover or may be structurally and permanently changed going forward. It will take years to understand the full impact of the pandemic.
We still favor post-pandemic companies and feel many people enjoy working, shopping and even learning from home. While many of us can't wait for a mask-free night on the town, a movie or a vacation, the return to normal may be further away than many people realize. Nevertheless, recovery themes have strong potential to outperform.
The long-term prospects across a range of themes tied to technology, demographics and consumer behavior are likely to remain strong. The past twelve months served as validation for many businesses investing in transformational change.
We continue to favor many of the themes that were winners in 2020, but are in the business of tracking changes carefully. The Investment Committee at WT Wealth Management meets twice monthly to discuss where we see the best and most compelling opportunities in a wide range of thematic ETF offerings – both those that were successful during the pandemic and those that will rise to the surface in the post-pandemic world.
SOURCES:
(1)https://www.tradersinsight.news/traders-insight/securities/macro/expectations-shattered-will-trends-of-2020-persist-or-revert/
(2)https://en.wikipedia.org/wiki/Exchange-traded_fund
(3)https://en.wikipedia.org/wiki/Thematic_investing
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management
(AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV.
WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely
from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are
determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each
investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have
the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment
objectives - thus making the account "separate" and distinct from all others we manage.
An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation
(FDIC) or any other government agency.
Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither
an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of
a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries
certain specific risks and part or all of an account's value can be lost.
In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies,
sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging
Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable
fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political
instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in
value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or
the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax.
Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we
strongly suggest having a personal financial plan in place before making any investment decisions including understanding
personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon.
WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption
or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of
transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without
registration or exemption. WT Wealth Management's website is limited to the dissemination of general information
pertaining to its advisory services, together with access to additional investment-related information, publications, and
links.
Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or
prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the
rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication
by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or
qualifies for an exemption or exclusion from registration in the state where the prospective client resides.
A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations,
business operations, services, and fees is available at the SEC's investment adviser public information website (www.
adviserinfo.sec.gov) or from WT Wealth Management directly.
WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability,
completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth
Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely
for convenience purposes and all users thereof should be guided accordingly.
Home
