- Steve Wreford, a Lazard fund manager overseeing $2 billion in assets, shares the six thematic trends in his latest fund.
- Wreford uses interviews with companies around the world to create themes, and then finds the underlying companies set to win off the trends
- Visit Business Insider's homepage for more stories.
2020 witnessed huge swings between value and growth investments; as Keynes said: "'the market can remain irrational longer than you can remain solvent."
But a third option exists: thematic investing, whereby investors identify key macro trends, then invest in the underlying companies that stand to gain most from these ideas.
By talking to companies about their future plans, investors can pull together a worldview through which they create an investing universe, Steve Wreford said, a Lazard money manager overseeing over $2 billion.
"We have over 4,000 company interactions every year, so we're able to pull a very comprehensive view of the world, and the picture of the world is very, very different than the last decade," he added.
Wreford's new $107.05 million Lazard Global Thematic fund builds on this philosophy.
The fund — managed alongside thematic-investing veterans Nicholas Bratt and John King, as well as ex-national chess champion Rugsit Kanan — is beating 76% of its peers year-to-date with returns of 22.21% compared to the MSCI AC World Index's 12.77%, according to Bloomberg data.
Wreford's investing framework
Technology has dominated the last decade. However, it will evolve and contend with three other issues that may support or offset its influence, Wreford said.
Firstly, geopolitics is becoming incredibly important as companies can "no longer rely on the stability of global institutions," he added. Secondly, sustainability issues can hit or propel investors and companies. If companies are on the "wrong side of societal change that can put a real hole in the portfolio," he added. Thirdly, monetary policy awareness is a "vital" component as the world could approach the end of a "40-year cycle of inflation around monetarism," Wreford noted.
Six World-Changing Themes
Wreford, who does not issue stock recommendations, shared these six themes used in the fund and how they are likely to develop.
1. Asset efficiency
The internet of things and connected devices are a "great investment thesis if you're living in 2009," Wreford said, as they are "fully discounted" by the market today.
But they lay the foundation for the next step: "automated efficiencies," Wreford added. For example, factory robots communicating without human intervention.
But rather than going to buy robotics stocks, Wreford argues industrial operating systems offer a much better opportunity.
Pointing to iOS and Android's role in the creation of two $2 trillion companies — Apple and Alphabet — Wreford argues that "industrial operating systems could be worth hundreds of billions of dollars."
"Yet, they're hidden today within fairly cyclical manufacturing companies that people wouldn't really think that there's a structural trend embedded underneath," he said.
One example can be found in agriculture, with companies like John Deere which has an operating system connecting all of the equipment together, he said.
Another example is buildings, he added, noting that retrofitted or new buildings will use operating systems to control things like air conditioning, heating, and energy efficiency.
"When you think about who owns those operating systems, it's actually a relatively small number of companies like Johnson Controls or Schneider, both of which are owned in this theme. What these guys can do is get their buildings to talk to each other, so a building can share why it's more efficient than the building next door, and actually improve things like energy efficiency," he said.
2. Bits of chips
With some pure plays on digitalization being "really overvalued," it's difficult to determine who wins, he added. But Wreford says he has a solution: buying components.
Producers of chips or semiconductors can give investors exposure across industry divides, from EVs to 5G infrastructure. For example, TE connectivity, a producer of connectors and sensors, gives investors exposure across industries, he said.
"These connectors can sell for as little as say $5 or $6. If you can imagine putting them into an electric vehicle, if they fail then the vehicle isn't going anywhere. So they're absolutely mission critical, but they're very low ticket," he said, adding that they are the definition of companies with "pricing power."
"They're small components, but they're valuable; it's rational oligopoly," he said.
3. Empowered consumer
Today's consumers — digital natives — are different, dependent on "peer reviews" and, in some cases, anarchism through their spending. This causes real problems for old-fashioned businesses, he said.
Therefore, to be a successful consumer company in 2020, brands need these qualities:
- Alignment with the ethical and societal values of that customer base, i.e. how it treats employees or protects its brand.
- A strong digital relationship with customers, not "just from a point of view of knowing what the customer likes, but in terms of actually producing your own goods and services in the future," he said. For example, "Disney is now able to see which parts of The Mandalorian people are skipping through… and then can feed that back into that production of the next season to make it better each time," he said.
- A vertical business model. "If you're responsible for making a good, distributing it and providing a service on it, then that means essentially you can control the entire customer experience," he said.
The final step in this theme will be the personalization of almost everything you receive, Wreford said.
"Today, you're at the end of the wedge when Amazon or Netflix recommends something. It says 'because you watched this, we're going to recommend this.' Just imagine where that's going to be by the time that artificial intelligence has had a chance to run over all your consumer data," he added.
4. 'Software as a standard'
Cloud and software-as-a-service technologies are fully discounted by the market today, pricing all software companies "as though they're the winners," he said. But, some companies could become "industry standards," he said.
One example is a company called Intuit which produces a tax software called TurboTax, as well as QuickBooks, an accounting software for small businesses. Evolving under pandemic conditions, Intuit provided virtual accountant consultations.
Ultimately, Intuit ends up owning a platform: "a software platform that enables the automation effectively of this white collar job — being an accountant — augmenting it and in some cases actually replacing certain parts of the supply chain as well," Wreford said.
5. Digital runway
FinTech has long been a buzzword, but for Wreford "emerging markets represent a far better opportunity for investors than developed markets," seeing access to financial services as a solution for societal goals.
In this theme, Wreford is focused on Chinese insurance, for example Ping An Insurance, as well as Indian and Indonesian banking.
6. Data, networks, and profits
Data has given companies like Facebook "effectively monopolies in all but name," Wreford said. However, the "free ride" is going to end because regulation and prices on personal data will increase, he added.
Therefore, B2B companies are more attractive, as they can contractually use data in a way that works for everybody, Wreford noted.
For example, Wolters Kluwer owns a legal database which can use AI to help lawyers find case studies most valuable to their research, he said. "Every law firm is going to want that. It's providing real benefits to the firm, to the rest of society as well, and you're not crossing any sort of regulatory difficulties and threats that B2C companies might come across," he concluded.
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