From the Bottom Up
A thematic approach to global investing

By Nicholas Bratt, managing director, Lazard Asset Management LLC

The world consists of one global economy and one global stock market. All companies compete for customers and capital in a single global marketplace and, therefore, investing in companies requires a global perspective. The future, however, is uncertain and therefore cannot be predicted. Identifying investment asymmetries at the corporate level will slant the odds in making successful investments. Bottom-up company research will provide insights into how the world is changing and can be the source of investment themes and big investment ideas. Portfolios can be built using thematic insights as the building blocks instead of hugging the benchmark. As uncorrelated investment opportunity sets, themes have proved to be more efficient diversifiers than country or industry.

A thematic approach aims to identify the major secular, cyclical and structural influences on the world’s economies and stock markets in the early stages of their development. The associated social, economic, industrial or demographic themes represent asymmetric investment opportunities in the investor’s favour and can determine the strategic direction of a portfolio at any given time.

Thematic analysis
Only change is assumed to be constant, not sets of observed or quantifiable existing relationships. Mean reversion and style-based approaches are recognized as incomplete investment tools. A thematic approach does not seek unique sources of information, but does apply unique thematic analysis to the information available. The success of a thematic approach therefore depends on the quality of the analysis.

Markets display inefficiencies over a longer-term time horizon and a discipline that focuses on the long term can exploit these inefficiencies. A theme-based approach specifically seeks to understand and exploit change, which is usually the driver of changing market environments in the long term, and diversification provides the ability to be patient while individual ideas mature. Sixty per cent of a thematic strategy’s alpha is derived from thematic choices and 40% from stock selection. Such strategies can be based on any set or sets of metric-based or qualitative assumptions about the global economy or financial markets. It is therefore very unlikely to become irrelevant as a result of changing market conditions. Second, a portfolio can be built around approximately ten different investment ideas (themes). This diversification ensures that even if one or two of these ideas do not work out, the portfolio as a whole is still effective.

To view Nicholas Bratt's presentation, click here.