Index Concentration and Smarter Diversification

There’s More to Diversification Than Buying the Index

Jonathan Simpson, Investment Oversight Analyst at ebi Portfolios, outlines the seismic shifts reshaping society, from climate adaptation and biotech to AI and space travel, and explains how investors can tap into these themes.

Megatrends are the long-lasting structural changes that reshape economies, societies, industries and markets over decades. The ones that often come to mind first are renewable energy, increasing migration, and ageing populations, but there are others emerging that could also reshape our collective future. 40% of the S&P 500.

Key overview‎‎‎‎‎‎‎‎
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1. Megatrends are long-term structural changes that can reshape economies, industries and society. Historical examples include the expansion of rail travel, widespread car ownership and the development of the internet.

2.Current megatrends include artificial intelligence, electrification, clean-energy production, biotechnology and personalised medicine. Although these developments may create investment opportunities, identifying a significant trend does not guarantee investment returns.
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Megatrends create huge opportunities for investors, but they also pose risks, and investing in them does not guarantee growth. History gives us plenty of examples.

Megatrends of the past

Rail travel was a defining trend during the expansion across the United States, but not every railroad company thrived – in fact, many failed.

The dotcom boom is another useful reminder. The internet was undeniably transformative, but that didn’t mean every early internet business was destined for success (Pets.com being the textbook example). At the height of the dotcom frenzy, many investors assumed that having an online presence was tantamount to a successful business model. It wasn’t. Pets.com famously ran a Super Bowl advert to build its brand before collapsing later that very same year.

Car ownership. Megatrends can have enormous impact on an array of related industries too. For example, private motor vehicles began to be mass produced in the early 1900s and now the majority of working adults own a car. This megatrend was not just good for Ford and General Motors, it also boosted demand for oil and tarmac. It caused communities to move into the suburbs, redefined the commute and completely transformed retail and logistics. Cars are now such an assumed part of our lives that we barely notice them, or their impact on wider society. Since then, aviation, mass media, social media, computing and semiconductors have all similarly infiltrated our lives as megatrends and ended up as accepted norms.

The question is, what will be accepted as normal in the future?

Megatrends of the future

AI. The obvious megatrend on everyone’s mind right now is AI and robotics and its effect as a catalyst for the replacement of human labour with automation. This has already begun with white collar jobs – coding, project management, law. The reason it hasn’t had the same impact on blue collar jobs so far is because real-world robotics haven’t caught up yet. Right now AI can ‘think’, but it can’t do. Over the next few years, that will change.

Electrification of cars, home appliances, even aviation for short-haul flights, the widespread storage of electrical energy and the batteries required for that, and the need for rare earth metals like lithium.

Climate adaptation and climate change prevention. Flood defences, air pollution, hurricane resistant infrastructure, defences against wildfires.

Energy generation, the transition from fossil fuels, oil, natural gas, coal, towards cheaper, cleaner and more reliable forms of energy like solar, wind, geothermal, and hydropower.

Space is getting cheaper. The cost per kilogram of hauling from ground level in to low Earth orbit has absolutely plummeted, and that has implications for several industries, for example, warfare, energy generation and data communication. We could see data centres in space, not to mention the potential for tourism and even mining, decades down the line.

Biotechnology and personalised medicine. The concept of Medicine 3.0 is where medicine is focussed on proactive, personalised longevity, tailored to the individual and often based on data collected directly from inside the human body.

Routes to tap into tomorrow’s big themes

At ebi we offer an Impact model portfolio solution (MPS), which invests in select themes through carefully chosen ETFs. As passive portfolio managers, we don’t take tactical positions based on the news or trends of the day. Instead, we use these ETFs from Rize ETF (now part of Ark Invest) which give us exposure to select megatrends using a long-term, buy-and-hold approach.

▪ Rize Sustainable Future of Food UCITS ETF – food production is an enormous source of carbon emissions – land use, deforestation, livestock which releases methane, the process of creating food, storage, refrigeration, transport, packaging. It is such a massive operation to feed eight billion people that it is having a significant impact on atmospheric greenhouse gas concentration. This ETF focuses on companies that are coming up with innovative solutions to the food crisis – things like efficient farming (vertical farming in skyscrapers), sustainable packaging, investing in water technology for irrigation, precision farming using AI, plant-based foods and lab-grown meat.

▪ Rize Global Sustainable Infrastructure UCITS ETF – holds companies that potentially stand to benefit from the worldwide effort to support infrastructure development in a way that balances ESG objectives. Waste management, water utilities, airports, care homes for the elderly, telecoms, thenintegrating all that infrastructure with renewable power, electricity grids, battery storage, EV charging, water treatment and flood defences.

▪ Rize Environmental Impact 100 UCITS ETF – invests in the 100 most innovative and impactful companies that potentially stand to benefit from developing and applying solutions that address the world’s most pressing climatic and environmental challenges. For me, climate change prevention and adaptation is the megatrend of the 21st century. It will determine which economies flourish and which ones don’t, the movement of people, of resources, and capital. It will become more and more urgent as the years go by. When future generations look back on this century, what will stand out as transformative is how humanity responded (or didn’t respond) to climate change.

The importance of patient capital

Patient capital is the idea that you should be able to invest in something and not demand immediate returns, and having that patience is necessary for investors who are investing in cutting edge themes and technology. In all the other portfolio suites ebi puts together, financial returns are the sole priority, but with the Impact portfolio we’re putting financial returns and real-world impact on a level pegging. Money that’s invested in Impact is being used as capital for long-term projects that will emerge over 10, 15, or even 25 years.

Megatrends are slow moving to be sure, but they are real and they are measurable. When investors commit capital towards thematic products, they are investing in long-term, transformative forces that often last for several decades, and which might totally transform our world.

ebi’s Perspective‎‎‎‎‎‎‎‎
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ebi’s Impact portfolio gives advisers access to a diversified model that invests across selected environmental and social themes. It uses thematic equity ETFs alongside green bonds to provide exposure to companies and issuers whose activities align with defined impact objectives.

We favour diversified exposure rather than relying on individual companies to benefit from a particular megatrend. As thematic investments may experience periods of volatility or underperformance, the portfolio is intended for clients with an appropriate risk profile and long-term investment horizon.
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Blog Post by Jonathan Simpson
Investment Oversight Analyst at ebi Portfolios

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