Investment themes for the next 25 years

HE world in 25 years’ time will differ from today’s world in some ways that we can already predict, and in other ways that will surprise us. Equally, there will be many similarities between tomorrow’s world and today’s, some of which will also be surprising.

Towers Watson’s Global Investment Committee has recently carried out a major study to understand the likely evolution of the global economy over the next decade and beyond, and the implications this will have for investment market returns and effective investment strategies.

The committee has identified twelve major themes that will impact on the social and economic landscape around the world, in the coming years. Thematic thinking seemed the most natural way to capture large scale trends.

In the context of investment management, we believe that thematic thinking has some advantages - although we will also discuss below the pitfalls and problems in apply-

Ting this thinking to investments.

There are some managers of equity (share) portfolios who explicitly call themselves “thematic investors”.

They try to identify economic themes that will influence the profits of the companies that they invest in, before these are spotted by the wider investment community – if they can do this successfully they will be able to buy shares that are cheap (because other investors have not yet spotted the profit drivers) and avoid others that are expensive.

More generally, many fund managers will put a value on shares, or other investments, that takes some account of the future income expectations that they have for the investment.

For instance, when considering whether the shares of a particular company are cheap or expensive, they may apply a multiple to the company’s current annual profits, which represent the discounted value of the company’s expected future earnings.

In this process there is always an assumption about the future (even if the assumption is that the future will be exactly like the past!). In our view it makes sense to be explicit about these assumptions, and to set out clearly what you believe about the future.

Thematic thinking is a tool to help with this process – and think-