Jenny Lowe speaks to Pictet Asset Management about the opportunities in environmental and social-themed investing.

The financial crisis graphically demonstrated just how hard it is to predict what will happen to global stock markets, at least in the short term.

But identifying environmental and social trends is much easier, according to asset manager Pictet, which launched its ‘Global Megatrends Fund’ just over a year ago.

The Luxembourg SICAV invests an equal percentage of its portfolio into eight of Pictet’s existing long-only thematic vehicles, namely the Biotech, Clean Energy, Digital Communications, Generics, Premium Brands, Security, Timber and Water funds.

It is marketed as being designed for investors who wish to gain access to the ‘most promising’ global megatrends. Senior portfolio manager Hans Peter Portner explains that the fund attempts to make gains from investing in current global trends such as increasing luxury goods consumerism in emerging markets such as China and Russia.

Thematic investing aims to identify sustainable trends rather than short-lived speculative fevers, such as the fact that wealthier emerging markets will invest in water infrastructure to provide the growing population with clean drinking water.

Several of the themes chosen for this fund have been given a boost by recent events. For example, US president Barack Obama’s pledge to sign up to clean energy initiatives and target increased investment in renewables.
‘Many of these themes will get more topical, and through the underlying funds we can show that we have a good investment story with some good returns,’ says Paul Gaston, head of sales at Pictet. ‘It goes back to the principles of very simple investing – this is a pure, long-only public equity fund.’

Rebalancing act
The fund is rebalanced on a monthly basis, reducing those themes that have outperformed, the idea being to replace those themes that are overvalued with those that are undervalued.

However, recent performance might well challenge some of Gaston’s claims. During February, the fund underperformed the MSCI World Index despite declaring a positive absolute performance. All investment themes, except Biotech and Clean Energy, were in positive territory.

The most significant performance contributors were Agriculture, Generics and Water, while Clean Energy was the biggest detractor to the fund’s performance.

Portner says, ‘From the perspective of a thematic investor, the outlook for Clean Energy is still attractive as £152 billion ($230 billion) of the government stimulus packages remains to be spent in 2010 to address carbon emission reduction targets. In the case of Biotech, earnings are expected to grow at 20 per cent while companies are trading near their ten-year lows.’

Against this, Portner and his team believe that biotech stocks will outperform in 2010: ‘The market opportunity in digital communications for interactive applications should continue to expand as products and services become more user-friendly, cheaper and more cost-efficient.’