For most of the past century, the investment community has categorized equity investments along the lines of asset classes, countries and styles, or simply on an individual stock basis. It wasn't until the late 1980s that the industry was introduced to the concept of investing in the context of “sectors”, which bundled stocks together based on the nature of their businesses.
Then, in the 1990s, the development of GICS – the Global Industry Classification Standard – honed this characterization. For the first time, all globally listed companies were classified in a single, coherent and non-overlapping structure: 10 sectors divided into 24 industry groups, and then divided further into industries and sub-industries.
This structure has remained largely unchanged since then, even though the world today is much different than it was when the categories were developed 25 years ago. This has made it increasingly difficult to determine the appropriate category for new business models. For instance, is Apple predominantly a consumer, telecommunications or technology stock?
Automation, digital-lifestyle trends and the rise of the emerging markets' middle class are all well-known trends driven by social, economic, demographic and innovation factors. However, none of these themes are properly captured using any of the traditional sector classifications, even though these themes are driven by forces at least as powerful as those that once dominated the traditional sectors.
With that being the case, shouldn't the asset-management industry react accordingly and offer investments that are classified more along the lines of themes? New technologies increasingly disrupt established business models and blur the lines between traditional sector categories, so why do so many investment vehicles still use these increasingly outdated categorizations?
Some early attempts to establish theme-based funds were made as early as the 1980s, but we have only recently seen investors become more interested in thematic products, which offer access to trends such as clean technology, consumers, water infrastructure and agriculture, to name a few.
We expect interest in theme-based investments to grow in the future, especially given that millennial investors in particular seem to prefer this model. Maybe that is because they grew up experiencing first-hand the impact of new themes on existing sector-based business models. It will be interesting to see how much of the wealth transferred to this generation will stay in traditional sector- and country-based investments, which still dominate the current generation's asset allocation, and how much of it will be shifted into new trends and theme-based investment ideas.
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Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
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AGI-2016-09-07-16255
