Thematic investing - Shaping a shared future

The age of megatrends

Our world is increasingly characterised by significant disruption. Many of the challenges and innovations that now define day-to-day life were almost unimaginable 20 or 30 years ago.

On one side we can see how our planet is under unprecedented pressure from environmental decline. The global population could reach 10 billion by 2050. Energy security and food security have become crucial issues. Meanwhile, technology is advancing at an unprecedented rate. In the face of crises, we are radically rethinking how we live, how we work, how we eat, how we interact and how we transact.

Thematic investing offers a powerful means of addressing these and other global challenges while embracing what are likely to be some of the most remarkable growth opportunities ever witnessed. These megatrends, or growth themes of the future, are bringing unprecedented change. Through thematic investing, investors can play a significant role in helping ensure change is positive and lasting.

Meeting Challenges

We have entered an era of renewable energy, alternative proteins, electric vehicles, artificial intelligence, virtual reality, machine learning, robotics, cryptocurrency and hyperconnectivity.

With radical innovation becoming a norm, the disruption already unfolding all around us is likely to shape not only our own lives but the lives of future generations for decades to come.

It will also require levels of investment potentially unparalleled in history. It has been estimated, for example, that the journey to net zero will need capital spending of $275 trillion by 2050^[1].

Investing in long-term disruption

All this suggests the age of megatrends is in full flow. This is why a key task for investors today is to understand the dynamics that are capable of shaping tomorrow and beyond.

Thematic investing offers a powerful means of framing these transformative forces. It can also serve as a platform for seizing some of the greatest growth opportunities ever witnessed.

A central aim of a thematic approach is to capture long-term growth potential regardless of short-term market movements. It is about seeing and taking advantage of the bigger picture.

The past versus the future

Investors are often told past performance is not a guide to future performance. Yet the reality is that many conventional forms of equity investing assume past “winners” will keep on winning.

Today, at a time of unprecedented change and churn, this assumption is far from guaranteed to hold. Many of the winners of the years and decades to come are only now starting to emerge.

Thematic investing aims to identify these winners by understanding the effects of megatrends at all levels. This means exploring not just the past but the future that is already in the making.

"A key challenge for investors today is to understand the dynamics that are capable of shaping tomorrow and beyond."

Key themes shaping the way ahead

A way of defining key disruptive investment themes is to apply the lens of global challenges. This might include taking account of the United Nations Sustainable Development Goals. Examples include climate action, zero hunger, reduced inequalities and no poverty. These are reflected in themes such as the journey to net zero and the transformation of the food system. Given their scale, many of these themes represent arguably unprecedented growth opportunities. They underline the crucial role of thematic investing in delivering positive, lasting change.

With this, we can define a number of dominant megatrends today: technology, demographics, climate change and real assets. Between them, they encompass various of these major structural shifts and investment themes. The interconnectivity increasingly central to 21st-century life means no single theme exists in isolation. For example, all the above megatrends are in some way linked to the climate crisis. Investors need to understand how numerous themes overlap, intersect and interact. They also need to understand how novel themes might develop, gain traction and exert greater influence.

At DWS, we categorize thematic equity into these 4 main clusters of: real assets, technology, demographics, and climate change.

Take a closer look at:

Real Assets

Megatrends such as technology, demographics and the environment feed into major themes like urbanisation, sustainable infrastructure and the journey to a net-zero global economy.

In turn, these themes can drive investments in real assets. Long-term, sustainability-focused asset classes in this space might include real estate, land, natural resources and commodities.

This distinct “cluster” of equity investments can be especially useful in helping manage inflation-related risks. It is also key to establishing a sustainable global supply chain network.

DWS Invest Global Infrastructure
DWS Next Gen Infrastructure
DWS Invest Global Real Estate Securities
DWS Invest Global Agribusiness
DWS ESG Real Assets

Technology

Technology has arguably been the world’s most influential megatrend for around half a century. There is every reason to believe it will continue to reshape our lives during the decades ahead.

Digitalisation in particular has now become almost all-encompassing. This is the era of the cloud, big data, artificial intelligence, blockchain and the ever-expanding Internet of Things.

Use of automation and robotics is also increasing at speed, while smart cities and the metaverse – an embodied version of the internet – are likely to become realities in the near future.

DWS Concept ESG Arabesque AI Global Equity
DWS Global Communications
DWS Invest Artificial Intelligence
DWS Invest CROCI Intellectual Capital ESG
DWS Invest ESG Smart Industrial Technology
DWS Invest Smart Industrial Technology
DWS ESG Mobility

Demographics

The global population stood at under three billion in the middle of the 20th century. It is expected to reach 10 billion by the middle of the 21st and is already around eight billion today.

A growing, ageing population has multiple implications. It brings large-scale changes in lifestyle. It places ever-greater strain on natural resources. It is likely to be key to mass migration.

Along with other demographic forces, it is disrupting long-established thinking around concepts such as productivity, healthcare, later-life provision, wealth accumulation and retirement

DWS Biotech
DWS Health Care TypO
DWS ESG Healthy Living
DWS Invest NextGen Consumer

Climate Change

The effects of climate change have become impossible to ignore. The United Nations has described the continued deterioration of Earth’s ecosystems as “a code red for humanity”.

The megatrend towards averting environmental disaster incorporates issues such as climate-change mitigation, renewable energy, a sustainable global food system and the “blue economy”.

It also encompasses many social dimensions. The climate crisis has become deeply entwined with global patterns of inequality – impacting livelihoods, health, security and other factors.

DWS Concept ESG Blue Economy
DWS Global Water
DWS Invest ESG Climate Tech
DWS Invest QI Global Climate Action

Why invest in thematics?

Thematic Investments as part of Asset Allocation

Advantages of investing in Megatrends

	Smart way to invest in possible "winners" and avoid possible "losers" through understanding the effect of megatrends an industry and micro level
	Good way to diversify existing assets from secular stagnation themes (weak(er) growth, low interest rate environment)
	Strategy to gain greater exposure to secular growth and themes by reducing exposure to purely cyclical factors.
	Decent approach to find a more favorable risk/return ratio to invest where risk is rewarded given trends, obstacles and likelihood is being analyzed.
	Integrating asset valuations to determine asset return impact via two vital routes: "what's priced in?" and " what's the impact on expected returns?"
	Megatrends represents game changers, and/or destructive events, but in any case, they also represent opportunities if impact on economic value is analyzed

The strategic attractions of thematic investing

Many traditional investment approaches aim to anticipate where markets might be in months, weeks or days. Some even aim to anticipate where markets might be in a matter of minutes. Thematic investing instead aims to focus on future winners that will deliver value over the long term. The objective is to anticipate where markets might be in years or even decades. This is because themes such as digitisation, sustainable infrastructure and climate action are likely to persist well into this century – and possibly the next. This is the ultimate long-term play.

Advantage of thematic investments in comparison with traditional investments:

Traditional investments

Benchmarks are given top billing, and investing is fairly easy as liquidity, regions and sectors as well defined. Admittedly, the benchmarks are less than optimal, because they give past winners a leading role.

Thematic investing is quite different:

Benchmark

It does not involve any ex ante view in terms of benchmarks; as we think of innovative processes in all-cap space.

Portfolio construction

The idea is to focus on potential future winners with no benchmark constraint (specifically in terms of market cap), no more predefined regional and sectoral constraints. However, diversification is still possible.

Correlation/ Diversification

Themes offers a certain decorrelation with traditional betas and with investment factors, which is important asset. Diversification ensures the key advantage of thematic investing: avoiding idiosyncratic risks.

Time horizon

Real long-term investments, in a world dominated by short-term; the average holding period for a stock has gone from 48 months in the 1950s, to eight months in 2000, and…22 seconds in the early 2010s

The tactical attractions of thematic investing

Reduced exposure to cyclical factors, a strong focus on risk/return ratios over time and diversification away from “stagnation themes” should all be key features of thematic investing. As well as bringing long-term advantages, such measures can have shorter-term benefits. For example, dedicated thematic approaches may be especially useful in an inflationary environment. In particular, thematic investments in real assets can help position portfolios more efficiently by providing greater liquidity in comparison to direct infrastructure or real estate investments for instance, reducing idiosyncratic risk and enhancing diversification.

Risks implied in Thematics Equity Investing:

Concentration risk

The fund invests its assets in selected regions or sectors. This increases the risk that the fund may be negatively influenced by the economic and political conditions in the respective regions or sectors.

Equity price risk

The fund invests in equities. Equities are subject to strong price fluctuations and thus also to the risk of price decreases.

Thematics Investing in DWS

At DWS, we recognize the investment opportunities present in Thematic Investing and the importance of developing for our clients, innovative products and solutions that respond to these new trends.

The DWS Research Institute

Through our DWS Research Institute, we define the key disruptive trends which we later transform into investment solutions that aim to deliver superior risk-adjusted performance to our clients.

Market expertise & global intelligence

With more than 60 years of investment heritage, our approximately 450 investment professionals apply deep market expertise and global intelligence to create both core and custom solutions. Precise product design and exacting standards of execution have long been a hallmark of all our investment strategies.

Proprietary fundamental research

Our equity research analysis is also key. We examine the relationship between a company’s business model and various megatrends, often identifying new themes from the bottom up.

Consistent & transparent investment process

Our consistent, systematic and transparent investment process allows us to identify those sectors, regions, themes, currencies and single stocks having the most favorable prospects.

DWS Thematic Funds – Fund Focus

DWS Invest Global Infrastructure

World Connector

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