Examples of themes include the digitalisation of work, e-commerce, or increased healthcare needs for those in developed countries. These are so ingrained in consumer behaviour that we do not even think about them day-to-day. Beneficiaries of these themes include Microsoft, Amazon and locally, Fisher & Paykel Healthcare.
Exercise wear becoming an everyday staple has been another lasting trend, although calling anything a long-term theme in fashion is a stretch. If you had identified this early and invested $10,000 in Lululemon at the beginning of 2009 your holding would now be worth $1.33 million - assuming you did not take any profits along the way.
A fad is a short-term or cyclical change in consumer behaviour that is often triggered by an event or temporary change to the economic environment. Fads can be surpassed by improved technology or lose popularity as quickly as they gain it.
The most recent examples of fads when it comes to investing are Covid beneficiaries such as Zoom, Peloton and vaccine producers including Pfizer and Moderna.
The share price of each of these companies skyrocketed in 2020 when Covid was all-encompassing. Zoom’s share price at the beginning of 2020 was US$67 ($110). In October 2020 it peaked at US$572, a gain of 733 per cent, but has subsequently given away all the increase. Peloton also briefly enjoyed a 700 per cent-plus return but is now trading at a quarter of its pre-pandemic valuation. Pfizer’s share price is also below where it was at the beginning of 2020. Moderna is an exception, having held some of the gains, however, it is still down 80 per cent from its peak.
Do all companies in a sector with a positive theme benefit?
Establishing a theme is only part of the challenge, next you need to establish which companies will benefit. While a theme can benefit all participants in a sector, sometimes it’s “winner takes all”. It is also not necessarily the first mover that reaps the rewards - IBM was well ahead of Microsoft when Bill Gates declared that there will be “a computer on every desk and in every home” and Apple didn’t develop the first mobile phone, but it resoundingly dethroned Nokia.
Sometimes with new technology, incumbent players do not need to be the innovator, as they can always follow fast or acquire. Using Microsoft as an example again, it was able to see the acceleration in the adoption of remote office communication from Covid lockdowns and use its massive development capabilities and embedded distribution to propel Teams to be a market leader.
2023 themes
Two main themes impacted financial markets in 2023. Artificial intelligence (AI), which powered the “magnificent seven” to double their market capitalisation during the year, and the commercialisation of GLP-1 class drugs for weight-loss, which saw Eli Lilly and Novo Nordisk provide shareholders excellent returns.
AI and weight-loss drugs are here to stay and the impacts will be enduring, with the benefactors broadening beyond just those at the forefront of development. These technologies will also threaten other markets, forcing companies to adapt or face the consequences.
How do you avoid a fad and benefit from a theme?
Avoiding a fad isn’t easy, particularly when it has momentum and appears to be long-term. When something is running hot, it’s human nature to feel you are missing out and need to get on board, but having the discipline to analyse the fundamentals is critical. Unfortunately, sometimes only hindsight can tell what category a trend will fall into and in certain cases, eg crypto, the jury is still out.
The best way to ensure you will benefit from current and future investment themes is by having a diversified portfolio of high-quality companies across a range of sectors and geographies. Portfolio rebalancing is another useful strategy to generate long-term returns and avoid concentration risk. Tailored financial advice from an adviser with access to leading global research will increase your chance of long-term success.
Andrew Ford is a Wealth Management Adviser at Jarden in Auckland.
