Omar Moufti introduces how thematic investing can be an essential resource for investors
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional market.
© 2022 Incisive Business Media (IP) Limited
The priorities for investors are changing. Increasingly, indices beyond traditional benchmarks are growing in popularity, with investors looking to build portfolios that reflect their beliefs as well as deliver returns.
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To learn more about thematics ETFs, search "iShares thematics" Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. © 2022 BlackRock, Inc. All Rights reserved. 2516481
Investment options are no longer limited by region or sector but allow the opportunity to target themes and opportunities that investors believe will reshape the world. This includes but is not limited to sustainability, allowing for a degree of nuance in supporting the global sustainable transition.
© 2021 Incisive Business Media (IP) Limited
For Professional Clients only
Against this backdrop, TwentyFour Asset Management has launched the TwentyFour Sustainable Multi Sector Credit Fund – aiming to deliver higher yields by targeting less-liquid credit opportunities and taking a high conviction approach to asset selection.
In this guide, we explore the fund’s strategy in detail and analyse how it seeks to tackle the uncertainty of today’s market while also matching investors’ sustainability expectations.
The global pandemic has left capital markets facing radical uncertainty.
Mike Fox and Rachid Semaoune on sustainable global credit investing
The pursuit of yield in sustainable credit
Focus is a publication that aims to bring you face-to-face with a selection of key investment managers, advisers and providers from across the institutional pensions market.
In this guide, Professional Pensions and iShares by BlackRock, explore the reasons behind the growing popularity of thematic investing and how their exchange traded fund (ETF) offering helps capture the opportunity in the space.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
To learn more about thematics ETFs, search "iShares thematics" Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The Commodity Producers Agribusiness Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares. iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. © 2022 BlackRock, Inc. All Rights reserved. 2516481
THE INTERVIEW
Name xxxxxx xxxx xxxxx xxxxxxx
Omar Moufti, Lead strategist on thematics for iShares by BlackRock EMEA, explores the appeal of thematic investing in exchange-traded funds (ETFs) and how the asset manager’s products straddle the line between active investing and indexing.
investors is rising in popularity.
hematic investing is on the rise. In an increasingly globalised world where industries and supply chains are being disrupted through geopolitics, digitalisation and sustainability, investing in a focussed pool of stocks that echo the beliefs of
T
Why is thematic investing becoming increasingly popular?
What differentiates thematic ETFs from standard-listed indices is that they are composed of a targeted selection of stocks not constrained by sector or region – they are selected by theme.
According to Moufti, one of the challenges in thematic investing is in establishing investible themes when there are an infinite number to select from. To address this, BlackRock has defined five global disruptive forces that are structurally changing the world, and conducts extensive research into how to express and invest in the opportunities that arise from them.
In recent years thematics have been one of the fastest-growing segments in the world of equities. Moufti highlights that the pandemic accelerated a lot of digitalisation and healthcare-related trends:
Working together
“I think the pandemic has been a good acid test for thematics since you had an event which brought forward some future trends. We saw the sustainable themes as being particularly resilient in this environment, due to the long-term structural growth drivers behind the companies the team invests in. This was a big boost to the growth of the industry.”
An immediate trend that looks to impact demand for thematic investing is inflation. While thematics are focused on gaining exposure to structural growth, they can also have value factor exposure. And in the case of rising inflation, commodity-linked themes have seen strong returns.
The process to true ESG integration can be long, complex and difficult for pension schemes - which is why TwentyFour Asset Management has re-aligned its investment thinking to help schemes on their sustainable journey goals
Gary Kirk, co-manager, TwentyFour Sustainable Multi Sector Credit Fund
has helped drive risk asset valuations ever higher despite the damage wrought by COVID-19, compressing yields and making portfolio income distribution objectives harder to achieve in both equities and fixed income.
I
According to law firm Norton Rose Fulbright, pension fund trustees must work together with their managers to integrate ESG and stewardship matters on their investment processes, since “the legal responsibility to ensure that ESG and stewardship are properly integrated rests with the trustee”.
At TwentyFour, the aim is to offer pension trustees investment products they are comfortable investing in both on ESG grounds, but also in terms of their return expectations. Wilson explains it is a “balancing act” between ESG with investment objectives. This means finding the sweet spot where “the investment universe is still wide enough for us to do our job, making sure volatility is within reasonable levels, while still meeting core investment objectives”, he says.
Structural & value opportunity
Another benefit to the growth of thematic investing is its accessibility. Investing presents a plethora of options across sectors, and with sustainability concerns, it can become daunting to understand how investments relate to the real world. Thematic ETFs are accessible to investors, with the perceived market opportunity being clear and upfront. In the case of iShares’ funds, the themes are also intrinsically linked to many of the UN Sustainable Development Goals.
One of the traditional barriers to thematic investing has been the additional cost associated with hand-picking stocks on an active-management basis, but this is changing. As datasets improve, and as companies disclose more data, asset managers have the freedom to develop solutions to bridge the gap between active investing and indexing approaches.
While iShares’ thematic range does not hand-pick specific stocks to invest in, systematic methodologies have been developed to find companies that are exposed to given themes. Moufti highlights that the end exposures are very similar to active funds despite blending features associated with indexing.
Active-like approach
Moufti explains that the products are particularly good at providing stories which clients can easily understand and invest in but reduce stock-specific risk by offering a diversified index product.
However, despite the difficulties involved Wilson does not see the interest in ESG from pension funds diminishing. “The momentum has gathered,” he says. “Every conference we go to, half the presentations involve ESG in some shape or form. It is quite self-fulfilling.”
Regulatory pressures, a spreading belief that green investing is “the right thing to do”, as well as a growing body of evidence that ESG-friendly companies tend to outperform laggards, are all driving forces behind the structural shift towards ESG. Fund managers will increasingly find themselves required to support pension trustees in this transition as net zero deadlines draw nearer and the pressures intensify.
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Charlene Malik, portfolio manager
INTEGRATING ESG
TwentyFour Sustainable Multi Sector Credit Fund
SUSTAINABILITY, VOLATILITY, AND THE PURSUIT OF RISK-ADJUSTED RETURNS
Alistair Wilson, partner
TRANSPARENCY VERSUS RELEVANCY
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Moufti explains: “These megatrends look towards long-term structural change and investing in their effects requires a very different method to that used to construct traditional indices. It's about where the world is heading and researching where we think there is an attractive opportunity set for the long term.”
Simon Merchant, co-founder and CEO
I think the pandemic has been a good acid test for thematics since you had an event which brought forward some future trends.
Emerging global wealth
In a post-pandemic world with growing market volatility and innovative new approaches to investing, thematic investing has seen a surge in demand.
Moufti explains that one of the thematic funds in their essential resources range has seen a sharp rise in returns. The fund – which is benchmarked to the S&P Commodity Producers Agribusiness Index - focuses on structural growth as it addresses the need for the world to produce more food with the same, limited resources, but in doing so, the fund has also benefited from rising commodity prices.
He says: “Agricultural commodity prices have spent the last 10 years in decline. That's why agribusiness has this value exposure to it. Last year this trend started to reverse, and has taken on more momentum this year with the geopolitical events that we've seen.”
The strong performance of certain themes in a globally volatile market illustrates the diversification potential of thematic investing. Moufti highlights that the themes agribusiness, timber and clean energy have seen a surge in demand.
He concludes: “If underlying investors can access it easier, can understand the opportunity better, then they're more likely to stay invested for the long term. Ultimately for everyone's retirement, that is the most important thing.”
FIVE MEGATRENDS ORIENTING iSHARES THEMATIC FUND UNIVERSE
Demographics & social change
Technological breakthrough
Climate change & resource scarcity
Rapid urbanisation
in-depth Q&A
SNAPSHOT
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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The Commodity Producers Agribusiness Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares. iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. © 2022 BlackRock, Inc. All Rights reserved. 2516481
ESG will drive asset performance, particularly among institutions that have to stand up and be accountable to their members
To learn more about thematics ETFs, search "iShares thematics" This document is marketing material: Before investing please read the Prospectus and the KIID available on www.ishares.com, which contain a summary of investors’ rights. IMPORTANT INFORMATION Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The Commodity Producers Agribusiness Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares. iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. © 2022 BlackRock, Inc. All Rights reserved.
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Focus on essential resources
2: ‘ESG: What makes 34…our chosen score?’, blog post, 20 May 2021.
Market cycles | Fund performance | Asset selection Portfolio construction | Measuring sustainability
FUND SNAPSHOT
How the TwentyFour Sustainable Multi Sector Credit Fund is designed to meet the challenges of a post-pandemic, sustainability-focused market.
ESG score less than 34 due to recent issues (governance concerns due to favourable treatment to shareholders over bondholders)
Air
Atmospheric levels of greenhouse gases, notably that of CO2, have reached levels never-before-seen in Earth’s recent history. Scientists now agree that Man’s actions are a primary cause of this increase and the corresponding rise in global temperatures. The energy sector in particular is the biggest emitter and achieving the Paris Climate Accord’s targets could require significant investment in clean and renewable energy production, primarily hydro, wind, and solar electricity.
Our iShares range of thematic funds is designed to access from various angles the Megatrends: five powerful structural shifts impacting businesses and the world in which we live.
Food
Water
Energy
Essential resources
The five Megatrends orienting our Thematic fund universe
Demographics and social change
Climate change and resource scarcity
Longer lifespans and modern lifestyles will change medicine and consumer habits
Demand for a clean, green tomorrow will advance energy and conservation
Newly affluent consumers will expand in Asia and across emerging markets
Mass migration to cities will require new business models and infrastructure
Technology is driving exponential progress in the tech sector and far beyond
iShares’ Essential Resources Thematic ETFs are a range of funds that track indices provided by S&P Dow Jones Indices, covering basic yet essential resources.
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ACCESS TO WATER
Select a resource for details
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WOOD, THE “NEW” MATERIAL
A RENEWABLE-POWERED FUTURE
FEEDING THE FUTURE
Forest ownership and proper management reduce illegal logging and ensure that forests grow and develop in a sustainable manner. These forests return a yield via timber sales and other fees. Such assets may be all the more attractive in periods of low bond yields. Underlying the growing demand for forestry products are the growth in the global population, societal preference for wood products as we come to acknowledge the detrimental impact of plastics, and increasing needs from the construction and paper & packaging industries. Further, with the development of carbon trading schemes, a new revenue source is developing, remunerating forest owners for their CO2 absorption and storage.
Over the next 30 years, the Earth will have to feed two billion additional people, most of whom are likely to be consuming more calorie-rich diets. At the same time, the availability of essential basic resources for agriculture, namely land, freshwater, and rural labour, is not increasing. Thus, investment into agricultural production appears set to continue in order to enhance crop yields, particularly new technology such as seeds and precision agriculture which aim to improve farmer profitability, efficiency, and industry sustainability.
Water is a key basic resource, often forgotten in the developed world, but underpinning economic prosperity nonetheless. The growing global population, alongside increased industrialisation and urbanisation, rising incomes and calorie intake, and weather volatility, are putting pressure on the world’s limited water resources. At the same time, the regulatory and societal emphasis on improved wastewater treatment has grown with greater awareness of the impact of water pollution. Investment in water services is likely to continue at a sustained rate to ensure demand can be met as well as compliance with environmental regulations.
Why this theme?
and 85.4m, the height of Mjøstårnet in Norway, the world’s tallest timber building completed in 2019. Wood is increasingly being favoured in various building construction, especially for its thermal insulation properties.
18 storeys
2
parcels shipped globally in 2021. Parcel volume has grown at a CAGR of 21% in the last 7 years and is expected to double in the next 5 years supported by e-commerce growth. Paper and carboard remain the packaging option of choice.
1
131B
is the approximate amount of CO2 stored in 1 cubic meter of wood. Wood’s renewable and carbon-absorbing potential could position it as a preferred material to steel or cement.
3
1 ton
Sources: 1. Pitney Bowes “Parcel Shipping Index 2019”. 2. Council on Tall Buildings and Urban Habitat. 3. Canada Wood Group “Influence of Material Use in Green Building Policies (A convenient truth)”.
decline in the global weighted average cost of electricity from solar photovoltaics over the decade from 2010 to 2020. Renewable electricity has become the most cost competitive source globally, undercutting coal, gas and nuclear energy.
85%
to $5.8T annual investment needed in energy supply and infrastructure over the next three decades to meet the net zero target (vs. $1.7T per year today).
$3.1T
of global greenhouse gas emissions emanate from the energy sector, including energy used in industry (24%), transport (16%) and buildings (17%).
73%
Sources: 1. Our World In Data covering 2016 emission, 2020 Report. 2. Irena, 2021. 3. BloombergNEF, 2021.
of the world’s arable land has been lost to erosion or pollution in the last 40 years. The projected arable land per capital is expected to decrease to 0.18h (from 0.21ha in 2020). More food will need to be produced with fewer resources.
33%
could be added to global GDP by 2030 through better connectivity in the agriculture industry, including crop and livestock monitoring, autonomous machinery, and drone usage.
$500B
people will be added to the world’s population between 2020 and 2050, increasing demand for basic necessities, such as food.
2B
Sources: 1. United Nations “World Populations Prospects 2019”. 2. University of Sheffield’s Grantham Centre for Sustainable Futures, 2015 and Food and Agriculture Organization of the UN “World agriculture towards 2030/2050: the 2012 revision”. 3. McKinsey, 2020.
litres of treated water are lost every day in the US due to deteriorating and ageing water pipes while the share of investment in water infrastructure borne by the federal government has fallen from 31% to 4% in four decades.
22B
the forecast annual global investment needs in water and sanitation infrastructure between 2016 and 2030.
$900M
people globally could face medium to severe water stress by 2050.
5.7B
Sources: 1. UN World Water Development Report, 2018. 2. Report card for America’s infrastructure, 2020. 3. OECD Environmental Outlook to 2050, (2012).
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The S&P Global Water Index, S&P Global Clean Energy Index, S&P Global Timber & Forestry Index, S&P Commodity Producers Agribusiness Index are products of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares. iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. © 2022 BlackRock, Inc. All Rights reserved. 2516481
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Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important Information. This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. The Commodity Producers Agribusiness Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares. iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. © 2022 BlackRock, Inc. All Rights reserved.
How iShares is evolving to ensure products continue to meet ongoing regulations
IN-DEPTH Q&A
Omar Moufti, Lead strategist on thematics, iShares by BlackRock EMEA
in-DEPTH Q&A
How could investors grasp opportunities using thematic investing?
It's climate change, demographic change, the shifting centres of economic power, urbanisation and accelerated technological adoption.
Clean energy is one of the sub-themes within the essential resources range. We have observed this theme has gained widespread traction over the last two years.
With the EU looking to cut carbon emissions and the US having re-joined the Paris Agreement as well as widespread grassroots impetus to fight climate change, we've seen huge demand to invest. Thematic products allow investors to invest in that structural change over the next decades.
Could you give an example?
Sticking with the clean energy example, if you look at forecasts from just 5, 10 years back, consistently they're multiples of magnitude away from what we’ve achieved, even though we knew there was a huge push for renewable energy coming.
At iShares, we are not selecting specific stocks to add or remove at different times because we feel a certain way about them. Indexing means creating a system to find the companies that are exposed to this theme and then investing in that system.
Traditionally, thematics has been in the active industry, traditional active fundamental business. Because the data was very hard to come by, you effectively had to pay higher fees for that active manager to search out which companies are linked to a specific theme.
What you end up with are exposures that are very similar to active funds since it's not your traditional market-cap weighted, large-cap biased indices. You get some very differentiated exposure which resembles active investment, but with fees that are lower.
What is your “active-like” approach?
This is on everyone’s mind. I think we all want to gift a healthy planet to our children, so we want to make sure we are helping drive positive change and encouraging behaviours that help meet that aim. We face this consideration as asset managers, the institutions we serve face it from clients, and its urgency is becoming more evident through the whole chain.
What is creating the demand from institutional investors for a sustainable approach?
Market outlook
Integrating ESG:
Investors face a mountain of regulation and a torrent of data and metrics relating to ESG factors. Charlene Malik, portfolio manager on TwentyFour’s newly launched Sustainable Multi Sector Credit Fund, explains the firm’s approach to these challenges.
Megatrends are these five global disruptive forces that are structurally changing the world.
The S&P Global Clean Energy Index is effectively made up of companies that are providing power from renewable sources as well as the technology and the equipment manufacturers. That's the clean utilities, wind equipment companies, solar cell manufacturers, and even hydrogen fuel cell makers.
One of the definitions of thematics for us is that it must be unconstrained by region and sector. It's quite different from that traditional asset allocation taking regional views and sector views. So Clean Energy captures companies globally, and across utilities, industrials and IT, among other sectors.
But in recent years, there's been an explosion of available data. We can now mimic the active approach and create these universes using these datasets to find the companies that are linked to each theme. And then we put them together in a diversified portfolio as an active manager would do.
If you look at forecasts of clean energy from just 5, 10 years back, consistently they're multiples of magnitude away from what we’ve achieved, even though we knew there was a huge push for renewable energy coming.
It depends on the investor. These are meant to be long-term investments and they’re designed so that you can invest in them for the long term because these are megatrend oriented. But even in the long term, there are different cycles. There are mini cycles so if clients want to tilt towards certain themes in the short term that definitely can be done.
Do you see these funds as geared towards retirement or can they be invested in for the shorter term?
We see the funds as applicable across the spectrum of clients and helpful for bringing retail investors into the fold. These products are particularly good in terms of providing stories which clients can easily understand and invest in but taking away the stock-specific risk by giving them a diversified index way of approaching it.
It's very much about where we think the world is heading and researching into where there is an attractive opportunity set for the long term.
Omar Moufti explains how iShares by BlackRock takes an 'active-like' approach to thematic investing and how megatrends might help investors generate returns.
What does iShares think about megatrends and how does thematic investing differ from normal investing?
From these megatrends, we derive investable themes. Four such themes driven by these megatrends sit within our Essentials Resources range and track indices provided by S&P Dow Jones Indices.
Thematic investing is different from the traditional Index fund (or ETF) method, which is taking an existing index like the S&P 500® and tracking it as closely as possible. It's very much about where we think the world is heading and researching into where there is an attractive opportunity set for the long term.
We believe companies that are exposed to these megatrends, to these structural growth themes, can grow faster than the market, than the average company. And maybe more interesting is that the market tends to underestimate the pace of change.
What do you see as the benefits of this approach over traditional approaches?
That's because we believe the interaction of capacity and cost reduction and the exponential nature of that growth is underestimated. As that growth comes through, that should result in these themes outperforming over time.
iShares ETFs are tracking indices and the indices are owned and administered by the index provider, in this case S&P Dow Jones Indices.
As I mentioned earlier, we've had a lot of new regulations in Europe on sustainability and there is a huge demand for sustainable funds. We engage with our index providers to maintain what are best-in-class products, that respond to evolving regulations and clients’ expectations - for example in October 2021, S&P Dow Jones Indices amended the index methodology to improve transparency, enhance diversification, further reduce the index’s carbon footprint, and align the index methodology with market trends and sustainable investing norms.
How much of a role does the index provider play versus the manager in these thematic exposures?
1. Source: S&P Global Clean Energy Index: A Path Towards Greater Transparency
Obviously, as bondholders, we don’t have voting rights to express our views on a company’s business practices, as shareholders do. But every portfolio manager has a relationship with these companies. If we want to express our dissatisfaction with an issuer on something or want to influence them to act in a certain manner, we have that direct route to the company’s decision makers.
Over the long term it is going to be about performance. We believe companies that are exposed to these megatrends, to these structural growth themes, can grow faster than the market, than the average company, and that investors will get rewarded for that growth over time. And maybe more interesting is that the market tends to underestimate the pace of change.
