Thematic Investing

Thematic Investing

Pictet Asset Management | For professional investors only |

Can thematic investments deliver consistent returns?

FT Investment Management Summit, 17 September 2014Luca Paolini , Chief Strategist, Pictet Asset Management

Very low returns in traditional asset classes in the years ahead …

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Source: Pictet Asset Management, as of June 2014

EM Asia equities

EM equities

JP equities

EM local (GBI)

Latam equities

EM Corporate

EM hard (EMBI)

DM equities

UK equities

US equities

EMU equities

Swiss equities

Eur Corp.HY

10Y US bonds

Eur Corp. IG

SBI

JPM EMU

10Y Ger Bunds

14.0%

10.2%

6.3%

6.1%

5.2%

3.9%

3.5%

2.9%

2.7%

2.6%

2.5%

1.3%

0.8%

0.3%

-0.1%

-1.0%

-1.1%

-3.0%

5 Y returns in USD, p.a.


Expected annual return over the next 5 years (p.a.)

… force investors to look for sources of additional return …

3Pictet Asset Management | For professional investors only |

ASSET CLASS

INVESTMENT STYLE PRODUCTS

TACTICAL (<6 months) EM Opportunistic

Market Neutral

Absolute Return

Smart BetaSTRATEGIC EM Valuation anomalies

SECULAR (>5 years) EM,

Alternatives

Structural growth

Mega and macro-trends

Thematic investing

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… and to overcome the traditional allocation straightjacket

Thematic Investing Traditional Investing

• Non-benchmark view : focus on future winners

• Exposure to secular pockets of growth

• No geographical constraints

• No market cap constraints

• No sector constraints : Thematic investing is a cross-sector, is looking for thematic purity

• Broaden diversification

• Benchmark driven

• Market Cap constraints : focus on past winners

• Regions easy to invest (e.g. developed)


From Megatrends to Investment Themes


Network Economy

Sustainability

Knowledge & Production Society

Demographic Development

Focus on Health

ImmaterializationPolarization

Democratization

Acceleration & Complexity

Globalization

Commercialization

Individualization Technology Development

Economic Growth

Digital Communication

Biotech

AgricultureClean Energy

Security

Timber

Premium Brands

Water

Generics

Source: Copenhagen Institute for Futures Studies

Premium Brands - From Megatrends to Investment Themes


Spending is growing fastest at the two extremes of the consumer spectrum: cheap and luxury brands are thriving.

Polarization

GlobalizationDemand for branded goods has spread far beyond the developed world: emerging markets now account for over 40% of premium brands demand; Chinese consumers will account for almost half of global luxury goods spending by 2025.

IndividualizationGrowing sophistication of local consumers and emergence of new heavy spender segments (empowered women, entrepreneurs, celebrities).

Economic GrowthDemand for luxury goods is expected to rise by c6-8% CAGR 2011-2015, boosted by the economic growth across emerging markets.

The evolution from the traditional to “new luxury”brand, which is more diversified, creative and aspirational and targets a broader consumer base.

Immaterialization

Rapid growth of the middle class in emerging-market consumers, keen to adopt western lifestyle standards; consumption also fuelled by both the growth and the ageing of the world’s population as over 50s will be wealthier and more leisure oriented than ever.

Demographic Development

Premium Brands opportunity


Water - From Megatrends to Investment Themes


Poor water quality as a result of lack of sanitation infrastructure and waste water treatment facility is a major health threat to humans

Focus on Health

UrbanisationAs the world’s population grows, so too will the number of and size of its urban areas.Currently, just under half of the world’s population lives in cities; by 2030, the UN predicts that 53% of us will be living in cities – that’s close to 4 billion people

Of the world’s total water supply, only 3% is fresh water. And of that 3%, only a quarter is useable – or unpolluted – water.The supply could be further reduced by changes in the world’s climate. Shifts in rainfall patterns, the steady disappearance of glaciers and changing river flows will each have a negative effect on the availability of fresh water, the UN says.

Sustainability

Economic GrowthDemand for water is expected to rise by over 50% as population growth increases water use among farmers, industry and households. In the period 2000 to 2050, consumption of water among both farmers and municipalities is expected to have risen threefold; in industry water use is set to double. Water availability is a necessary condition for economic growth.

The process of increasing the efficiency of a sector by transforming it into a commercial business. For Water this megatrend is referring to the team up of private companies and public bodies (called Public private partnerships) to provide water services to households and businesses.

Commercialization

Water Opportunity


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Performance of Investment Themes

Source: Pictet, as of September 8th, 2014, in USD, gross of fees

Performance of MSCI World Versus Pictet Theme Strategies since September 2009 (in USD, gross of fees)


0.00

50.00

100.00

150.00

200.00

250.00

09.2009 09.2010 09.2011 09.2012 09.2013

GMS Timber Clean Energy Water Biotech Generics Digicom Premium Brands Security Agriculture Index MSCI World

Benefits from including themes in a portfolio

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Individual risk / return profiles compared to MSCI World since inceptions

Source: Pictet Asset Management, GIPS, MSCI, Bloomberg, as at 31 July 2014


Volatility

Return

Investment Themes in a Global Portfolio

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Advantages Constraints

Thematic overlay

(higher active weights in core

portfolio)

• Simple

• No change in portfolio construction

• Unwanted biases

• Inconsistency of investment horizon

Core-satellite approach (thematic baskets)

•Variable weights – themes and sub-themes•Fixed weights

• Longer investment horizon

• Stronger focus

• Reduced biases

• Requires thorough knowledge of themes

• Requires dedicated teams

Multi-asset thematics

(equities, fixed income,

alternatives)

• Bigger pool of available securities

• More refined risk/return profile

• Complexity

• Requires sophisticated asset allocation capabilities


Check list for theme assessment

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Criteria Definition

Liquidity & Thematic purity

Pure and liquid portfolio

Feasible investment portfolio with assets > USD bn 1 @ thematic purity > 20% where 50% of the assets can be liquidated in five trading days @ 20% of average trading volumes

Diversification

Low overlap with traditional indices

Overlap with MSCI World < 20%

Expected outcome

Robust & attractive risk-return profile

Expected risk return profile beats MSCI World (Sharpe ratio)

Theme withstands stress test through different scenarios

Materiality Measurable thematic drivers with material impact on value drivers

Materially accretive and measureable megatrend related impact to value drivers (growth, margins, risk premium)


Investment Themes in a Global Portfolio – Passive or Active?

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› Megatrends known but …

› Megatrends are not per se value-creating (e.g. democratization)

› Long investment horizon = low turnover = low transaction costs

› Exposure to themes (“Thematic Purity”) and shifts between sub-themes are key

› Megatrends often implies disruptive technologies: pick winners and losers (e.g Apple vs. Nokia)

… Active portfolio management is required!


18% 12%25% 29% 35%

57%64%

20%17%

19%23%

36%

32% 24%

57%68%

52%46%

27%

9% 11%

31.12.2007 31.12.2008 31.12.2009 31.12.2010 31.12.2011 31.12.2012 31.12.2013

Energy Efficiency Low Carbon (incl. Natural gas) Renewables Cash

Evolution of portfolio – Clean Energy

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Thematic breakdown by fund

Source: Pictet Asset Management


Conclusions

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› Intersection of megatrends define thematic investment strategies

› Exposure to a scarce resource: secular growth

› Thematic investing improves risk/return profile

› Core-satellite approach preferred

› Active management required: shifts between themes and identification of thematic purity


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Biography

Luca Paolini joined Pictet Asset Management in 2012 as Chief Strategist.

Before joining Pictet, Luca worked as an Equity Strategist at Credit Suisse Securities, responsible for asset, regional and sector allocation. From 2005 to 2007, he was Investment Strategist at Union Investment. Luca started his career in 2001 at Allianz Dresdner Asset Management as a trainee then assistant vice president, covering asset allocation and investment strategy.

Luca holds a Master degree in International Economics and Management from SDA Bocconi School of Management in Milan, and a Laurea Magistrale in Political Sciences from the University of Bologna.

Chief Strategist

Strategy team

Luca Paolini


For more information,please contact

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The information and data presented in this document are not to be considered as an offer or solicitation to buy, sell or subscribe to any securities or financial instruments.

Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Funds (Europe) S.A. has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.

The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.

Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.

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Pictet Asset Management


APPENDICES


The Development of Thematic Investing at Pictet Asset Management

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2008

Pictet-Leisure

2005

2004

1998

2006

1995

2007

1997

Pictet-BiotechThe world’s first biotech-focused fund

2000

Pictet-WaterThe first fund to invest in the value chain of the world’s most critical resource, Water

Pictet-SecurityInvests in companies in the physical and IT security business (excludes weapons and nuclear energy)Pictet-

Telecom

Pictet-GenericsA pioneering fund focusing on low-cost drug makers

Pictet-Premium BrandsFocuses on the strong consumption trend of luxury and aspirational goods and services

Pictet-Digital CommunicationInteractivity as a key driver in communication,

explores opportunities of the digital world for business and individuals

Leading thematic investor with over USD 20bn in assets under management

Pictet-Clean EnergyInvests in the global energy transition, favoring carbon-free or low-carbon energy sources and energy efficiency

2010

2009 Pictet-AgricultureFocuses on the world’s food value chain

Pictet-Env. Megatrend Selection - Strategic exposure to Water, Clean Energy, Timber & Agriculture

Pictet-Global Megatrend Selection

Exposure to all of our thematic equity strategies

Pictet-TimberInvestments span across the full timber value chain,

a scarcely researched resource of major relevance for the world

Repositioned

Repositioned

Source: Pictet Asset Management, (includes AUM from Japanese utility funds, but excludes thematic mandates)


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Decision parameter: Risk return profiles

Source: Pictet, as of September 8th, 2014, in USD


Fund Startdate

Annualised return

Volatility rf Sharpe ratio

Fund MSCI Fund MSCI Fund MSCI

Biotech Nov-95 14.53 6.63 29.42 15.6 3.7 0.49 0.19

Water Jan-00 9.5 3.7 15.62 16.01 3.1 0.61 0.04

Generics Jun-04 10.69 7.08 16.77 15.9 2.6 0.63 0.28

Premium Brands Jun-05 10.36 6.77 22.18 16.47 2.5 0.46 0.26

Security Jan-06 8.91 4.54 16.84 17.6 2.1 0.53 0.14

Clean Energy May-07 -0.07 3.34 25.91 18.18 1.9 0 0.08

Digicom Jun-08 13.51 6.25 18.14 18.78 1.6 0.74 0.25

Timber Nov-08 14.58 14.42 25.16 16.53 1.5 0.57 0.78

Agriculture Jun-09 12.7 12.61 17.96 14.53 1.5 0.7 0.77

Themes sales exposure

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No Geographical constraints


Funds Europe North America Emerging Markets RoW*

Premium Brands 30% 30% 40% 0%

Security 25% 48% 15% 8%

Digital Communication 15% 60% 20% 5%

Clean energy 14% 52% 34% 0%

Agriculture 17% 43% 30% 10%

Timber 15% 50% 30% 5%

Water 32% 38% 26% 3%

Biotech 24% 65% 8% 3%

Generics 10% 40% 40% 10%

Source: PAM, May 2014, * mainly Japan

Thematic Investing

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