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Thematic Stocks: Carving Out a Portfolio Space for Secular Winners

Photo courtesySteve Freedman is Head of research and sustainability, Thematic Equities at Pictet Asset Management

We can’t blame readers of the financial press for thinking that active investing is not worth the time and effort. They are often told that because stock prices capture all available information accurately, investors should abandon their pursuit of alpha, i.e., active investment performance, altogether.

It’s a compelling argument: passive investing is an inherently attractive proposition, especially since investors welcome low fees and greater transparency. However, it would be incorrect to say that active equity investing has lost its purpose.

A good proportion of active equity investment strategies become distinguished over time. Research shows that when investment managers stay true to their strongest convictions and avoid holding stocks simply to alter a portfolio’s tracking error, such approaches can be successful.[1]

All of this helps explain why Pictet Asset Management argues that allocating capital to thematic equities, characterized by their research-intensive, index-independent approach, presents a path to potentially higher returns.

The main objective of a thematic equity strategy is to invest in companies that benefit from structural forces that evolve independently of the economic cycle. In other words, it seeks to transform long-term megatrends, such as urbanization, globalization and climate change, into investment opportunities.

Implemented correctly, the thematic approach can offer investment managers a greater number of opportunities to generate alpha compared to conventional equity strategies. This is partly because it requires an in-depth understanding of complex economic and non-economic phenomena that require large-scale resources not available to all asset managers.

At Pictet Asset Management, our thematic teams have worked for many years with strategic consultancies, academics and business leaders to design a framework that tracks both the evolution and effects of 21 megatrends in the economy. Using this model, detailed below, we have identified 16 distinct investment universes comprised of companies with above-average growth prospects.

Pictet’s megatrends analytical framework

Source: Pictet Asset Management, 2024

Among these is robotics. Here, advances in artificial intelligence mean that robots are becoming part of everyday life, whether at home, in the office or in industrial plants.

Healthcare companies are also seeing their prospects improve thanks to powerful structural trends. On the one hand, technological progress promises to improve diagnostics and accelerate drug development. On the other hand, an increasingly long-lived population and growing middle classes in emerging markets are expected to drive demand for healthcare and diagnostic services in the coming years.

According to our forecasts, the returns of each of these two thematic universes could outperform the MSCI World index by 20% over the next five years.[2]

While thematic stocks can be a source of alpha, the analysis also allows us to conclude that they can serve as a complement to a passive equity allocation. According to our calculations, there are almost as many thematic stocks as there are companies represented in conventional equity indexes. This means that it is just as easy to diversify an equity portfolio with a thematic approach as with a traditional one benchmarked to a standard global equity index. In addition, the composition of a thematic equity portfolio bears little resemblance to more traditional global equity indexes.

This does not mean that the thematic approach is suitable for everyone. Those who invest over short investment horizons or who cannot tolerate significant deviations from benchmarks from time to time may find thematic stocks unsuitable. However, for investors willing to take a longer-term view, this approach offers the opportunity for superior equity returns.
Many investors consider active equity portfolio management to be expensive and unlikely to add value after costs. However, while simple math indicates that the average active investor should underperform, there are investment policies that can consistently add value over time.

We believe Pictet Asset Management ‘s active thematic equity strategies are among them, for several reasons:

The design of thematic strategies incorporates a broader view of alpha, which goes beyond simply outperforming an index. Thematic investing takes a holistic perspective, starting with the selection of an appropriate and superior investment universe.
We allow our investment teams complete freedom to select their stocks, eliminating “forced” or “uninformed” investment decisions.
We focus on stock selection, which is generally more promising than sector/regional or market timing bets.

Guest column by Steve Freedman, Head of research and sustainability at Pictet Asset Management.

For more insights on opportunities within our Robotics fund, please click here.

TD Bank Will Pay Fines Amounting to About $3 Billion in the U.S. for Practices That Facilitated Money Laundering

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The U.S. Department of Justice accused Toronto’s TD Bank of fraudulent actions that enabled criminal money laundering activities and imposed fines of about $3 billion.

The bank pleaded guilty to the accusations of failing to implement adequate controls for almost a decade to detect and prevent the laundering of funds from illicit activities.

“TD Bank created an environment that allowed financial crime to flourish,” stated Attorney General Merrick Garland, as reported by the local press.

Additionally, the attorney general was firm in his comparison: “By facilitating its services to criminals, it became one of them.”

At the end of September, the bank issued a statement announcing a provision of $2.6 billion in its financial results to cover the fines the financial institution expected to have to pay.

“We recognize the seriousness of the deficiencies in our anti-money laundering program in the U.S., and the work needed to meet our obligations and responsibilities is of utmost importance to me, our senior executives, and our boards of directors,” said Bharat Masrani, Group President and CEO of TD Bank Group at the time.

Furthermore, the Fed also issued a statement announcing that the central bank’s Board had decided to impose a fine of $123.5 million “for violations related to anti-money laundering laws.”

“TD failed to conduct adequate risk management and oversight of its U.S. retail banking operations, which resulted in the use of a U.S. subsidiary to launder hundreds of millions of dollars in illicit proceeds. The Board’s action will help ensure that TD operates in compliance with all U.S. laws and regulations,” the Fed’s statement said.

Moreover, the banking authority requires the Toronto-based entity to establish a series of actions.

First, TD must set up a new office in the U.S. dedicated to addressing the deficiencies identified by the authorities.

Additionally, TD must relocate parts of its anti-money laundering compliance program responsible for adhering to U.S. law to the U.S. and certify that “sufficient resources and attention are allocated to correcting the company’s deficiencies in its anti-money laundering efforts before issuing dividends or distributing capital.”

Finally, a comprehensive and independent review of the board of directors and company management must be conducted to ensure proper oversight of U.S. operations.

First Trust Announces the Launch of a New ETF

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First Trust Advisors (“First Trust”) announced the launch of a new ETF, the First Trust New Constructs Core Earnings Leaders ETF (FTCE) (the “fund”), according to a statement obtained by Funds Society.

“The fund seeks investment results that generally correspond to the price and performance (before the fund’s fees and expenses) of a stock index called the Bloomberg New Constructs Core Earnings Leaders Index,” the firm’s release states.

New Constructs determines core earnings by reviewing company reports and identifying non-core and non-recurring gains and losses through its proprietary rating system, using a combination of technology and expert analyst review.

Additionally, FTCE provides exposure to companies that are part of the Bloomberg New Constructs Core Earnings Leaders Index (BCORE). BCORE uses a quantitative approach to select the top 100 companies from the Bloomberg 1000 Index (B1000) with the highest earnings quality, based on Earnings Capture. A positive Earnings Capture reflects stronger business fundamentals and may present an investment opportunity, the statement adds.

“The rise in valuations has been a key driver of returns in the current bull market, while earnings growth has been more moderate. Consequently, for the bull market to continue, we believe investors may focus more on stocks with the potential to deliver high-quality, repeatable earnings,” said Ryan Issakainen, CFA, Senior Vice President and ETF Strategist at First Trust.

Meanwhile, Allison Stone, Head of Multi-Asset Products at Bloomberg Index Services Limited, commented, “It’s exciting to work with First Trust and see how our differentiated approach to earnings analysis is available to investors through an ETF. We’ve combined Bloomberg’s leading data and research with New Constructs’ analysis to create the index with a fresh perspective on the true earnings of companies.”

BECON IM and New Capital Announce That Their Series of Fixed Maturity Bond Funds Has Raised 400 Million Dollars

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Becon IM y New Capital lanzan fondos de bonos

BECON Investment Management, in partnership with New Capital, announced on Monday the close of the fifth issuance of Fixed Maturity Bond Funds, significantly surpassing initial expectations, according to a statement.

“With this latest issuance, which raised 65 million dollars, the total for the five series exceeds USD 400 million, consolidating both firms’ positions as leaders in the fixed-income market for Latin American and US Offshore investors,” the statement adds.

Fred Bates, an executive at BECON IM, highlighted the success of the FMP series, affirming that “we are committed to continuing to launch new products and share classes that are relevant to our clients in the US Offshore and Latam markets. New Capital is a highly dynamic firm with the ability to quickly adapt to investors’ needs.”

Juan Fagotti, also an executive at BECON IM, emphasized the depth and diversity of New Capital’s product offerings, underscoring the importance of providing tailored solutions for each investor profile.

“Each of the five fixed maturity funds, with maturities staggered from 2025 to 2029, has been marked by a rigorous and diversified investment strategy focused on active bond selection, geographic diversification, and active risk management,” said representatives from BECON IM.

“The success of this fund series reflects the growing demand for fixed-income products among investors in Latin America and the US Offshore market. In an environment of low-interest rates and high uncertainty, investors are seeking investment alternatives that combine stability and potential returns,” they added.

In addition to the Fixed Maturity Bond Funds, New Capital offers the New Capital USD Shield Fund (a short-duration, high-quality fixed-income fund) and the New Capital Global Value Credit Fund (a fund focused on relative value corporate bonds, designed for investors with a longer-term investment horizon and tolerance for a higher level of risk).

Barings Appoints Ilena Coyle and Graham Seagraves as Co-Heads of Distribution for North America

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The asset manager, owned by Mass Mutual, has initiated a change in its leadership structure for North America with immediate effect.

Ilena Coyle will assume her role as Head of North American Insurance and Intermediary, while Graham Seagraves will take on the position of Head of North American Institutional and Consultant Relations. Together, they will jointly oversee the firm’s regional strategy to expand Barings’ strategic relationships with existing and potential clients, reporting to Global Head of Distribution, Neil Godfrey.

Coyle and Seagraves will work at Barings’ headquarters in Charlotte, where they will strategically oversee and expand a team of 25 distribution professionals in key regions across North America.

“We are thrilled to welcome Graham to Barings and to congratulate Ilena on her promotion, as we continue to deepen our partnerships with institutional, insurance, and intermediary clients, working closely with the investment teams to support the firm’s long-term growth goals,” said Godfrey.

Seagraves joins Barings from Russell Investment Group, where he held senior distribution roles for over 18 years, most recently serving as Managing Director and Head of Client Solutions for its Institutional Americas business.

“His extensive experience managing institutional client relationships also includes previous positions at OFI Institutional Asset Management and Global Distribution Strategies,” the firm’s statement adds.

“Barings has a strong track record of providing customized investment solutions to clients, and I am excited to collaborate with Neil and Ilena to shape and execute our North American distribution strategy in order to grow the platform, deepen client relationships, and drive third-party asset growth,” Seagraves stated.

Coyle, meanwhile, has worked in the industry for over 15 years, including at MetLife Investment Management, where she was a member of the Institutional Client Group before joining Barings six years ago. “Her expanded role will build on her deep knowledge of the firm and her experience within the distribution team, where she has been responsible for overseeing Barings’ third-party insurance relationships,” the firm added.

“At Barings, our goal is to be long-term trusted partners and to meet the evolving needs of existing and potential clients by leveraging our broad and deep expertise across all asset classes,” Coyle said.

HSBC Mexico Launches a Balanced Fund in Dollars

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HSBC Asset Management Mexico has launched the HSBCMDL Multi-Asset Balanced Fund in Dollars, “an option designed for investors seeking diversification and a global portfolio referenced in U.S. dollars without actively seeking exposure to Mexican assets,” according to the firm.

According to the institution, the fund’s primary goal is to generate long-term returns by investing in dollar-referenced global debt and assets.

The HSBCMDL Fund invests in equities from developed and emerging markets, treasury bonds, and other global debt instruments, providing diversified exposure to the world’s leading economies with a focus on dollar-denominated assets.

The investment process follows HSBC Asset Management’s global guidelines and focuses on active risk and performance management, adapting to changing market conditions to optimize the asset mix over time.

Antonio Dodero, Executive Director of HSBC Asset Management Mexico, explained, “The launch of the HSBCMDL Fund addresses the growing need for investment solutions that align with local market expectations. This new offering also strengthens HSBC Asset Management Mexico’s relationship with clients seeking innovative financial products.”

HSBC also reported that the fund’s availability is 24 hours after execution, with a recommended minimum holding period of three years. It is aimed at both individuals and corporations and operates Monday through Friday from 8:00 to 13:30 (Mexico City time). Various fund series are available to accommodate the specific needs of each investor type.

The HSBCMDL Multi-Asset Balanced Fund in Dollars offers global exposure across various asset classes and geographic regions, with a balanced portfolio of approximately 50% in equities and 50% in debt. The fund’s active management allows investors to benefit from opportunities presented by the global economic environment.

Additionally, investment in pesos with a dollar reference allows investors to capture both financial instrument returns and exchange rate movements. It’s important to note that the fund does not invest in Mexican assets, except for occasional short-term peso cash positions or those implied in collective investment instruments.

“The ideal investor profile includes individuals or entities looking to diversify their portfolio with foreign investments, seeking dollar exposure, and who can tolerate exchange rate fluctuations. This profile also includes those preferring professional management of their investment, with assets distributed according to global market conditions, focusing on a balanced mix of equities and debt,” Dodero explained.

HSBC Mexico provides further information on the fund through its official HSBC Asset Management Mexico page

EJE Investment Aims to Win Over Chilean Investors With Section 8 Real Estate Assets in Miami

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(cedida) Patricio Eskenazi, socio de EJE Investments

EJE Investment, a young international real estate advisory firm, aims to attract Chilean investors with Section 8 subsidized rental properties in Miami. With the Chilean real estate market going through a crisis, local investors are searching for different vehicles to secure rental income, which EJE believes can be found in U.S.-based assets.

“In Chile, the appetite for the real estate market is negative,” highlights Patricio Eskenazi, a partner of the firm, in an interview with Funds Society. “But that doesn’t change the fact that people love investing in real estate, because it’s a very solid asset,” he adds, with tangible guarantees and monthly cash flows.

When people invest in real estate domestically, they can do so directly or through a fund that invests in this asset class. In contrast, foreign investment has a broad range of funds available but high entry barriers for direct purchases.

“Why did people invest in an apartment in Independencia or Huechuraba and not in Miami? The simple and obvious answer is that it’s what was accessible and what they knew how to do,” he says. On the other hand, although investors hear about good opportunities in Miami, they don’t know how to access that market.

Along these lines, Eskenazi highlights that EJE Investment provides comprehensive advisory services, including legal matters, investment structuring, and a network of service providers in the United States, without holding client funds.

This means support throughout the entire process: buying the houses, negotiating, hiring a manager, arranging bank loans, legal procedures for registration, tax advice for structuring a company in one of the two jurisdictions, etc.

For clients, the partner explains, “we leave them receiving rents.” Moreover, he emphasizes that clients do not need to set foot in the U.S. to acquire the asset or obtain financing, as there are banks specializing in loans to foreigners.

The Appeal of Section 8

EJE Investment’s approach is anchored in a particular mechanism that, according to Eskenazi, offers a more attractive investment profile: the Section 8 subsidy, a government program aimed at people who have difficulty paying the full rent.

“It’s much more profitable and much safer,” explains the professional, with less risk of non-payment since “you receive two payments: one from the tenant and another from the U.S. government.”

On average, the U.S. Treasury pays around 80% of the property’s rent, with the remaining 20% covered by the family. In some cases, this portion can reach 90% or even 100%, reducing the portion of cash flow at risk of non-payment by the tenant.

Additionally, Eskenazi notes that these are more profitable businesses since houses rented by families with Section 8 subsidies rent for 20% to 30% above a non-subsidized rent.

“If you buy one of the houses we’re always buying, at $440,000, you’ll rent it in the private market for around $2,400 or $2,500. But if you rent it to a family with Section 8, you’ll rent it for about $3,000,” illustrates the partner at EJE.

Regarding assets, the firm works with all types of residences, including houses, apartments, and townhouses, which are already built. The average age is between 10 and 15 years, he notes.

Although they don’t rule out evaluating opportunities in other markets, the Chilean firm is focusing on Miami for now, where they see many opportunities. “For now, we’re set for a good while in Florida,” says Eskenazi, adding that this area is more familiar to Latin American investors.

In the first half of the year, representatives from the real estate investment firm traveled to Kansas and found attractive investment opportunities, but people find it more challenging to venture into that city compared to Miami.

Expanding Access

“We’ve done extremely well, and we started less than a year ago. That’s because people who had bought something here in Chile realized that the rents aren’t very good,” explains Eskenazi. Part of the interest also comes from a segment that traditionally hasn’t had access to this sector: people outside the high-net-worth circle.

The largest portfolios in the Chilean market have been participating in this business for years with a different dynamic. “The institutional world and larger investors seek very large investment sizes,” explains EJE’s partner, adding that this justifies mobilizing the necessary resources to structure the investment.

EJE’s model, meanwhile, offers access to investors who can invest around 3,000 UF, equivalent to around $123,000. The cheapest property costs 6,000 UF ($246,000), but half covers the down payment, says Eskenazi.

In the range between that amount and the band of $30 million to $50 million, “there’s been a lot of interest,” says the professional, with higher-net-worth investors purchasing multiple assets.

“We started with the high-net-worth segment, but a lot of people who wouldn’t be considered high-net-worth in the Chilean industry have reached out,” adding that “you don’t need to be high-net-worth to buy a house.”

The backdrop is that “investment alternatives in Chile are quite limited now,” according to the executive. In this context, two trends work in favor of EJE’s model: the rise of alternative assets in Chile and the outward flow of local investments abroad.

For now, the firm plans to continue focusing on Chilean clients. In the future, when they seek new markets, they anticipate doing so alongside local partners familiar with specific legal frameworks and who can instill trust through local familiarity.

Origin Story

The search for different investment opportunities brought together the four partners who founded EJE Investment last year.

Eskenazi comes from the financial industry, where he is a familiar face. Alongside a 20-year career, which includes positions in Itaú Chile’s private banking, MCC Inversiones, Banco Penta, and the family office Monex Inversiones, according to his LinkedIn profile, the executive is a panelist on the economic radio program “Más que números.”

Seeing that the local Chilean market was “bad,” he began looking for foreign alternatives, leading him to meet brothers Rodrigo and Jack Jaime. Rodrigo has a 17-year real estate career, including the development and construction of six buildings for Chile’s largest senior housing operator, and a diploma in Real Estate Law from the Universidad de los Andes. Jack also has studies in this field and holds the CIPS (Certified International Property Specialist) designation from the National Association of Realtors in the U.S.

According to Eskenazi, the Jaime brothers had been investing in Section 8-related individual assets in Miami on their own for over 10 years when they met. Then, the idea arose to leverage their collective expertise into a service for others. “If the market is so large and deep, and we can buy a house every three to five years, why not do it for clients as well?” he illustrates.

While formulating what would eventually become EJE Investment, they concluded that a key ingredient was guiding investors through the entire process, “taking the client by the hand.” This led them to bring on a fourth partner to handle legal and tax advisory: attorney Patricio Escobar, a tax law specialist who led the Tax and International Transactions practice at EY in Miami—where he lives—and Boston.

Hamilton Lane Launches Two New Infrastructure Funds for Clients in Latam and the U.S.

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Hamilton Lane has launched the Global Private Infrastructure Fund (“HLGPI”) and Private Infrastructure Fund (“HLPIF”), offering accredited investors worldwide greater access to private market infrastructure investments, according to a statement accessed by *Funds Society*.

The Hamilton Lane Global Private Infrastructure Fund (“HLGPI”) is available to qualified investors, including high-net-worth (“HNW”) investors and their wealth advisors, in EMEA, Australia, Canada, Latin America, and Southeast Asia.

On the other hand, the Hamilton Lane Private Infrastructure Fund (“HLPIF”) is a closed-end, continuously offered investment vehicle registered under the Securities Act of 1933 and the Investment Company Act of 1940 (“’40 Act”) and is available to U.S. clients, including HNW investors and their wealth advisors.

HLGPI and HLPIF are total return strategies aimed at both capital appreciation and income, designed to provide exposure to a global portfolio of institutional-quality infrastructure assets through a single investment, the firm’s information adds.

“Focused on identifying and capturing strategic opportunities in infrastructure, including direct and secondary investments, the Funds aim to deliver attractive returns and downside protection, along with liquidity through monthly or quarterly redemptions,” the fund explains.

Both HLGPI and HLPIF seek to capitalize on unique opportunities in the electricity, transportation, data and telecommunications, environment, and energy sectors, according to Hamilton Lane.

For over 24 years, Hamilton Lane has developed SMA mandates (as per the English acronym) focused on infrastructure, designed to deliver attractive returns relative to benchmarks for clients of all sizes worldwide. These new vehicles are an extension of Hamilton Lane’s broader infrastructure platform, which the firm has been building since 2000 and includes closed-end funds and SMAs totaling nearly $72 billion in assets under management and supervision as of June 30, 2024, the firm explains.

The SEC Awards $12 Million in Compensation to Whistleblowers

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The SEC announced a $12 million award to be split among three joint whistleblowers who provided critical information and assistance in an enforcement action by the agency.

The whistleblowers offered key information and “extensive cooperation,” which helped expand the scope of the investigation and the charges filed in the enforcement action, and also saved the agency significant time and resources, according to the regulator’s statement. The individuals met numerous times with the SEC’s enforcement staff, and some faced hardships due to their reporting.

“The whistleblowers played a key role in helping the SEC hold wrongdoers accountable,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower, adding that “even when an investigation is already underway, whistleblowers can contribute by providing new information on misconduct.”

Whistleblower payments are made through an investor protection fund, established by Congress, which is entirely financed through monetary penalties paid to the SEC by violators of securities laws.

Under the law, whistleblowers may be eligible for a reward when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10 to 30 percent of the money collected when monetary sanctions exceed one million dollars.

As established by the Dodd-Frank Act, the SEC protects whistleblower confidentiality and does not disclose any information that could reveal their identity.

Managers Believe That Small and Micro Caps Will Benefit From the Fed’s Rate Cuts

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Small y micro caps beneficiarán de recortes de la Fed

The latest survey by New Horizon Aircraft reveals that 75% of fund managers specializing in the small and micro-cap segment believe the interest rate cut cycle initiated by the U.S. Federal Reserve (Fed) will considerably benefit the valuation of these companies. This survey included fund managers from the U.S., Canada, Europe, the Middle East, and Asia, who collectively manage assets worth $82.4 billion.

Another conclusion from this survey is that 59% of managers believe the Fed will cut rates at least once more in 2024, while 16% think there will be only one more rate cut before the year ends. Additionally, fund managers expect the Fed to continue with cuts: 19% anticipate three cuts in 2025, 59% expect two cuts, and 20% predict only one cut.

According to the survey’s authors, this expectation of multiple rate cuts aligns with 82% of the surveyed managers who believe U.S. interest rates will have fallen from the current 4.9% to 4.3% or lower by the end of 2025. Approximately 14% even think the rate could drop below 4.1%.

Since 40% of the debt of companies in the Russell 2000 Index is short-term or variable rate, compared to around 9% for companies in the S&P, 89% of fund managers expect that the anticipated drop in interest rates will have a more positive impact on the valuations of micro and small-cap companies than on large-cap companies. Seven percent of fund managers were unsure, and only 4% disagreed.

Experts caution that although U.S. inflation decelerated to 2.5% year-over-year as of August 2024, it still remains above the Federal Reserve’s 2% target. Nevertheless, 89% of respondents believe the 2% target will be achieved within the next 12 months, specifically in the second quarter of 2025.

The survey authors emphasize that these perspectives bode well for the valuations of micro and small-cap companies, as evidenced by the 99% of respondents who expect the economy in 2024 and 2025 to provide a more favorable basis for the valuations of these smaller firms. In the current context, with global small-cap companies trading at the steepest discount to large caps in over 20 years, the same proportion (99%) of fund managers expect micro and small companies to generate solid returns over the next 12 months.

“Expected Fed rate cuts could significantly benefit small and micro-cap companies. This view is shared by the fund managers who participated in our research, all of whom specialize in managing funds that invest in emerging small and micro-cap companies with high growth potential. Small-cap companies with unique and transformative technologies are once again in a position to offer investors an opportunity for significant gains,” concludes Brandon Robinson, CEO of Horizon Aircraft.