The Five Megatrends that will Underpin Long-term Investment Returns, and how to Access them

The current macroeconomic environment has given asset managers and financial advisers a great deal to think about. We are not only battling the impact of rising inflation and interest rates on our clients’ portfolio returns; but being challenged to rethink asset allocation strategies under the very real threat of climate change, challenges posed by ageing populations and demographic changes spurned on by global trade and urbanization. One of the questions we frequently encounter is whether our index-tracking solutions are flexible and nimble enough to respond to evolving market conditions, and more importantly whether index-tracker ETFs can capture emerging trends.

The answer is an unequivocal “yes” as many of the index-tracking solutions that we offer are specifically developed to accommodate the structural changes that exhibit in both domestic and global markets. Nowadays, thanks to our global reach in collaboration with BlackRock’s iShares, Satrix can structure products that give institutional and retail investors cost-effective exposure to opportunities as diverse as India and China, responsible investing and ESG, as well as global infrastructure. More recently, we also launched index-trackers that invest in companies primed to benefit from aforementioned global megatrends.

BlackRock describes thematic investing as “an approach which focuses on predicted long-term trends across specific companies or sectors, enabling investors to access structural, long-term shifts that can change an entire industry”. It is obvious that the first step on a thematic investing journey is to identify those trends that will impact our economies and societies for decades to come, and result in structural shifts in capital markets. BlackRock’s five megatrends include climate change and resource scarcity; demographic and social changes; rapid urbanisation; shifting economic power; and technological breakthrough. Each of these trends are long term indicators of transformative forces that investors’ portfolios should be aligned with.

At a recent panel discussion hosted by Satrix, Omar Moufti, Product Specialist with the iShares EMEA Product Team, offered clear insights into the process that asset managers are taking to access megatrends via thematic investing. “It makes sense to take a global and unconstrained approach to each theme; the idea is that an alignment between companies, megatrends and themes, and the structural tailwind this creates, will help these companies grow faster than the rest of the market.” In addition, the outperformance will persist over the long term, and for much longer than market participants tend to discount.

Thematic investing, by its very nature, challenges traditional thinking about asset allocations to regions and sectors of the market. That explains why the index-tracking products that are designed to take advantage of megatrends and themes are region and sector agnostic: it may be necessary to hand pick companies from the US, Europe and even emerging markets, and from quite divergent industries. The benefit of working with the world’s largest asset manager is that they have the data and processing capabilities to define these themes and identify the likely winners under each. Moufti explained: “We use highly granular data sets to capture the essence of each theme, for example we can interrogate the revenue streams of thousands of firms to determine what portion of a firm’s revenue is generated from exposure to each megatrend or theme.”

The easiest way to get to grips with thematic investing is to examine some of our index-tracking solutions. For example, our Satrix Healthcare Innovation Feeder ETF, which launched in May 2022, offers access to global companies that are leading the rapidly evolving global medical innovation theme. This index gives investors exposure to the long-term outperformance associated with two of the five megatrends, namely demographic and social change (ageing populations) and technological breakthrough.

The Satrix Smart City Infrastructure Feeder ETF, launched July 2022, also offers investors diversified exposure to the global companies that will benefit from providing the services necessary for the development and efficient running of cities in a sustainable manner. Firms in this fund will leverage off most of the megatrends, including climate change and resource scarcity; demographic and social changes; rapid urbanisation; and technological breakthrough. By investing in this ETF, investors gain exposure to over 170 global companies that provide services related to resource use efficiency, including water recycling, urban connectivity, and human wellbeing development.

The BlackRock range of thematic investment funds, which we track using our locally listed feeder ETFs, are an easy, low-cost way for local investors and intermediaries to hold global companies that will benefit from the five megatrends, so identified by BlackRock. We believe this to be one of the most sensible ways for local investors to lock in the long-term outperformance on offer from thematic investment, with the added benefit of rand hedging through significant offshore diversification.

Disclaimer

Satrix Managers (RF) (Pty) Ltd (Satrix) a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to it being listed on the JSE. The tracking errors for the Satrix Healthcare Innovation Feeder ETF and the Satrix Smart City Infrastructure Feeder ETF are not available as these are newly established ETFs. Past performance is not necessarily a guide to future performance and the value of investments/units may go up or down. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. A feeder fund is a portfolio that invests in a single portfolio of a collective investment scheme, which levies its own charges and which could result in a higher fee structure for the feeder fund. International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political rick, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market information. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The index and the portfolio performance relative to the index can be viewed on the ETF Minimum Disclosure Document and or on the Satrix (www.satrix.co.za) website. Satrix Investments (Pty) Ltd is an authorised financial service provider in terms of the Financial Advisory and Intermediary Services Act, 2002.