Investing in trends with Thematic Portfolios, with Freddy Lim and Stephanie Leung

Episode summary

Freddy and Stephanie introduce StashAway’s Thematic Portfolios and share how you can invest in trends that can (literally) change the future!

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Episode transcript

Philipp: Welcome to another episode of In Your Best Interest, your personal finance podcast. I'm your host Philipp Muedder. With us is Freddy Lim, the co-founder and CIO of StashAway, and also Stephanie Leung, the Head of StashAway Hong Kong and Group Deputy CIO.  Both of them should be well-known by our listeners, as we had them both separately before on our podcast, as well as if you listen to our weekly or market commentaries from StashAway, you will know that faces as well. So welcome back, both of you.

Freddy: Thank you, Phillipp. Pleasure to be here. And thanks, Stephanie, for joining us.

Philipp: I'm very pleased to have both of you on today, because I know you guys worked very hard with your themes on getting thematic portfolios to investors at StashAway.  So, why thematics? And basically, I want to take a step back there, and maybe Freddy you can start with this is,  What's kind of the history of thematic portfolios, and what are they even right? Like, if, if a listener has no idea? How would you explain that to them?

Freddy: Well, to put it in the simplest way, thematic investing is a strategy that identifies these game changing trends and phenomena that have the potential to generate a huge impact on society, and our environment in the future.  [02:00]

So that is really the ultimate goal, you want to find those big game-changing trends that you believe in, are shaping our world, and you want to find a way to benefit from it. When eventually they do change everything around us, you also want to have your portfolio reflect that as well. 

But then a little bit about how our approach here is a little more precise - in the sense that in the industry, it tends to be more marketing driven, because people find a theme or a storyline that's easy to sell and you always find someone who already believes in it. Then you know, it’s easy to get them to invest in. 

However, we believe that a lot more work has to be done, you can have a megatrend on a big theme that is very vaguely-worded. It can be too vague for actionable investments. So what we do is to drill down from these big megatrends, we drill down to the sub themes, to find those sweet spots where we can actually access the markets, we can actually break a big megatrend into sub themes to diversify the portfolio as a first line of defense. 

A good example is smart cities can be a big theme, but it can mean a lot of things to different people. But smart cities can include being an investor in mobility, which means you will be investing in electric vehicles, or even the latest innovations in battery storage and even FinTech companies itself. 

So it can mean a lot, but you have to drill it down to what makes up the big theme and which of those sub themes can truly be invested. [04:00] This is similar to people who do single stock investing. 

But a single stock in the thematic sense is a very risky proposition. Because you are investing in very futuristic companies that you know, anything disruptive which has exponential growth also has high volatility, right. So what we want to do is make sure you have the first line of diversification by spreading your investment across a basket of companies, geographies, and across the sub themes that make up the big theme. 

I hope I'm not losing anyone here but I felt the sweet spot in investing, I don't often see it. At StashAway when we curate these portfolios, we kept that in mind.

Philipp: I think it was a great explanation, and when you think about, you know, thematics, Freddy, or Stephanie as well, when you guys think about it in terms of a client's portfolio as well, right?  

Like, a client might say, hey, you know, I want to invest into - I'm just making this up - you guys, you guys, tell me if I'm completely off - if I want to say, oh, I want to just invest in, in a biotech ETF, or I want to invest in socially conscious companies only, right?.  Do you prefer people to just invest in that area then? 

Or should they still have like a core portfolio of you know, like, if you think about retirement planning, right, have a core portfolio add thematics on top to generate alpha? Or do you see it more as a complimentary item, when you think about investing? 

Freddy: Well, first of all, thematic investments should complement your existing financial plans and portfolios, and ideally, your core portfolios are very global multi-asset in nature, and super diversified. 

But because they are super diversified, they don't allow you to drill into certain things that you really believe in, [06:00] have a passion for, have done a lot of work, and really personally want to gain from it. So the generalisation approach does not allow you. Thematic investment can be a nice complement for users who care about certain themes, and the standard risk measure, risk budgeting, rainy-day fund, everything in the plans remains intact. 

It's just that now your whole portfolio is not just the global core portfolio, it could be now a global core portfolio with some with a few themes in the mix. That's how I view it. But I think Stephanie has a lot to say on this topic.

Stephanie: I guess yeah. Well, I definitely agree with what Freddy said. And I'd like to think about thematics in two ways. One is, compared to a core portfolio, it's different, it may be a different time horizon that you’re considering. 

So for thematics, of course, the potential gain is more exponential, because the technologies that we're investing in, are basically at the crux of being widely adopted. That's like, for example, maybe where Tesla was a few years ago, or maybe what Zoom was before COVID. These can offer great potential returns, but also the time horizon needs to be longer than your core portfolio, because these are much more volatile than traditional assets. And they are not necessarily tied that much to the economic cycle rather than to the technology cycle.  

Then secondly, diversification is very, very important in that sense, because it's a little bit like investing in early ventures. You may invest in 100 companies, but maybe 90 of them go bust and 10 of them survive, and 2 of them become multi-billion companies. [08:00] And that's how VC investors or early stage investors think about investments, which is why having a portfolio approach makes a lot of sense. 

Philipp: I think that's very important, because I think Freddy said, like, you kind of go from the megatrend, to the theme, to the topic, and then it's almost like single stock investing. 

And I think that's really where the difficulty comes,right? Because, you know, if you think about this, thematics in, technology or in the future of consumer technology and things like that, there's only a few companies and there needs to be a lot of research to be done to find the right one, right? 

So how have you guys thought about this? How are you gaining exposure to these different themes? Because, as a single investor, yes, I can make a bet on Tesla and hope it works out, right?  That's a car/tech battery - maybe there are battery providers, and all kinds of other things in that topic. 

So how are you approaching that? Because it goes with that topic of diversification that you just mentioned, right? 

Freddy: Yeah, I mean, there's at least 4 dimensions to it. But just to start with something simple. There's a belief that thematic investing tends to be concentrated, which is by design, because you say, I want to invest in mobility then everything you have is in mobility, right?  

However, because of the way we define a theme, as I mentioned previously, we went from the mega into the sub and we use the sub themes to build up the portfolio first, the thematic part of the portfolio first. 

So to give you an example, the 3 themes introduced are Technology Enablers, Consumer Tech, and Healthcare Innovation. Just in the case of technology enablers, we are taking a deep dive and looking at how the world actually operates, and how it's actually changing - what kind of new core technologies are influencing how the world operates.  [10:00]

In this case, artificial intelligence is super exciting, blockchain-based technologies are increasing adoption, robotics are obviously - this automation in the factory theme has been there for some time and we are just taking it to the next level. Cloud computing, exacerbated by the pandemic, how we work that's another big area. Semiconductors again, with the shortage, we currently do not have enough of those and so when you drill it down. 

You can say, wow, what kind of AI companies do I want to invest in? What kind of blockchain companies can I invest in? What kind of robotics, semiconductors, cloud computing companies I want to invest in? 

Then you go out there and look for a basket of those things to invest in, and the ETF approach, that drills into the sub themes, which can be particularly nice in terms of diversification. You don't just live or die by when the stock goes to zero, right? Because the ETF will always rebalance things for you, it would never have waited for a company to go bust, the rebalancing thing would sort of rebalance a name out and get a new name into the index. 

That itself serves as a first layer of protection for the user. Among the different sub themes that make up the big themes, that's just another layer of further diversification. So, I personally felt that we already brought two layers of diversification with this approach.

Philipp: So you're not actually investing in a single stock then right? Freddy, you and the team actually are investing into ETFs and using ETFs in order to create these thematic portfolios. 

So that's very exciting I think because 5 years ago, we wouldn't have been there because there wouldn't be that many ETFs that would actually be able for us to choose from, to create these thematic portfolios by using ETFs instead of single stocks, right?  

Freddy : Well, we sort of [12:00] take a ranking-based approach. For each theme, for example, in the case of artificial intelligence, we would first do a very broad-based screening into our processes. 

And we tend to rank funds by their liquidity, their tracking error, and, also, of course, the expense ratio comes in. But we tend to focus more on how well they do their jobs before the expense ratio kicks in. 

Philipp : Yeah, super interesting. So Stephanie, maybe you want to take a stab at a couple of the other themes that we came up with, and why they are interesting for people?

Stephanie: Yeah, I mean, we have 3 themes that we're offering right now and that we have more themes that are coming. But the second theme is Future of  Consumer Tech. I mean, the way that we think about this is basically, technologies that you can actually touch and feel, that are changing your lives. We mentioned Tesla before. So Future Mobility is actually one of the sub themes. And it is not just Tesla, but like the whole value chain, around EV. 

And other future transports, like we're talking about, for example, space transports quite a bit in recent months.

Other themes include, for example, gaming. Gaming is in itself becoming an economy and growing very, very quickly. FinTech is just another sub theme - internet, social media, e-commerce. 

These are more traditional kinds of consumer technology companies. 

And then last but not least, the theme which I believe is also Freddy's favourite. So Freddy we can talk more about is Healthcare Innovation.

Freddy: Well, thanks, Stephanie. Yes, it's truly my personal favourite, not just because of the pandemic, but even pre-COVID-19. We have already seen huge progress in the area of biotech, even genomics, immunology, [14:00] the further advancements in medical device manufacturing and pharmaceuticals as well. 

So these 4 areas, these 4 or 5 areas within the healthcare theme, really, really resonates with me personally. 

Philipp: I'm just happy because I'm super excited that you actually have that many choices. Because I know you know, what we've been through all three of us, been doing this for a long time. 

And when ETFs started and become mainstream, right with just SPY, GLD and stuff like this, then really mainstream wants to now having really all these niche products for people available to take advantage of, you know, certain trends versus having to go out there and find each company themselves is, it's a game-changer really, right? 

Freddy: I’m pleased to say that, although the choices are a lot, we also found that a lot of them are not liquid, and the ones that we are using. They are super exciting because they rank between 90th to 100th percentile in terms of liquidity ranking against their peers. So that makes it even more fulfilling for us - in the process of building it, we realise we can actually choose something that user will have no problem putting money every day and withdrawing money anytime that they want - that maintains a StashAway philosophy.

Philipp: A core one that we always have. We preach to people to take a look at. So taking a step back, why did you end up choosing these 3 themes? And why are they relevant? Why did you choose them in the first place? Is it something you heard from users? Is it something that you know, the investment team thought of as the most promising ones? 

Freddy: Well, firstly, myself and Stephanie and the team, we actually came up with 24 sub themes, big themes. [16:00] And then we pass it along to our content managers and product managers for curation. And that process is interesting too, because we started getting playful and creative with how we mix and match across all the themes, to create a mega theme. 

And additionally, we tested users as well and got feedback. And that feedback was what really guided us, which came first. We've seen Technology Enablers, very popular, Future of Consumer Tech, really popular, Healthcare Innovations, for sure, but there's obviously more. The spoiler is there's a lot more that will come in the next quarter and, and we will keep launching those series of themes that our user truly believes in.

Philipp: Now that you said there's 24 that you came up with. Let's leave it as a surprise. But I'm sure there will be more interesting ones coming. Maybe Stephanie,  Freddy, and you both mentioned that we still do this all with a very risk-mitigating approach, right. 

And, you know, obviously ERAA®, for people who are not familiar with what we talked about on the podcast before, but obviously, if you've been a follower of StashAway, you know that ERAA® stands for Economic Regime Asset Allocation model, right? 

And that's very core to our offering. Freddy and Stephanie, especially on the investment side of things, right, like this is one of our USPs and one of the things that we're really proud of. So how does thematic investing now fit into that overarching scheme or asset allocation model of ERAA® now that we offer them?

Stephanie: Yeah, I think, I think that is a great question. It is actually central to how we think about everything that we do [18:00] from an investment side in StashAway. We start from risk and I think when we started out thinking about what kind of thematic portfolio we wanted to offer to our clients, and how it can be differentiated versus what's available in the market, we started to combine that with ERAA®. 

This has resulted in some very, very interesting products that we can offer to people. I mean, traditionally, if you go to, let's say, if you go to a US stock exchange, and you buy a thematic ETF, you don't necessarily know what kind of risk that ETF will incur, especially for thematic investments. 

As I said before, it's usually quite high risk. So people would end up buying maybe too much risk. Either it's just too big of their overall portfolio or too concentrated, or they don't even know what is the risk that they incur. 

When we built our thematic offering, we wanted to combine the best of ERAA® and also thematics in that we actually allow people to choose what kind of SRI they want to be at when they invest in the 3 different thematic portfolios. So the lowest risk that we can offer is 20% SRI, for example, and all the way to the highest risk is 45% SRI. And we use this, we use a mix of balancing assets and thematic assets to achieve this balance. So I think this is something that's truly innovative at StashAway. 

Freddy: Yeah, I mean, that thanks for mentioning this Stephanie, because like what we normally found was, like I mentioned before, the first problem was, the themes are not well-defined, and people just wanted to find something to sell as a marketing tool for when it comes to launching thematic products in the industry. 

For us, we first drill down and diversify within the sub themes. But second, we also allow people, not just because you have a lower risk profile, you're excluded [20:00] from thematic investment, right?  We don't believe that. We believe we should be accessible to anyone. 

So what we do is to say why don't we mix in enough protective assets that will balance out the risks so that we can reproduce a bunch of thematic investment portfolios for different users that have different risk profiles? Obviously, if you have a higher risk profile, you can go 100% in it. 

And say the StashAway risk index of 45% is fine for Technology Enablers, but somebody else may say no, I belong in the SRI 20% category. And I'm fine with having less thematic exposure. I want that balancing act from the protections. So I think that that philosophy is very key  and continues to be maintained. This StashAway philosophy is maintained even while we design these thematic products.

Philipp: Yeah, very interesting. So thank you. Thank you for this because I think that's a very important part. I want to drill down a little bit deeper on this though, and ask you one more follow up question there. 

So if I'm an investor I already have a couple of StashAway portfolios, right? Or maybe I don't have any StashAway portfolios. When I need to think about my financial plan as a family or as an individual, would I need to open up a regular StashAway core portfolio? And then another one for my thematic portfolios, or would you say I just need one of them? 

One thematic portfolio to cover all my financial planning purposes? What do you guys think about that? 

Freddy : Well, it's just me, I'm sure Stephanie has a version and Phillipp, yourself as a veteran investor, I think the answer is no, there's not one single correct answer to this. But if I may start with this, I would say look, in my case, [22:00] I’m a StashAway Risk Index of 22%, that's my natural habitat. If I want to invest a lot in a theme, I would choose SRI 22% as well. 

That's one way to use it, then there's some other ways where the same person may say, I want to choose 100% exposure to the theme, and it's SRI 45%. But I'm going to invest less, I may have 5% of my overall net worth in it and SRI 45%, right? If I get hit with a 45% loss on this temporarily, 45% of 5 is only, you know, less than two and a half, right?  So it's sort of OK by me in the extreme case, I'm happy with it. 

So that's one another way to think about it. If I have SRI 20%,  I can afford to put in bigger numbers. So I think both ways achieve pretty similar results. I'm not sure there's other ways to go around it but I'm sure Stephanie has ideas as well.

Stephanie: Yeah, I think it's really coming down to personal preference. I mean, firstly, I think you need to choose which theme you invest in, which themes are the ones that you care most about, or get excited about or think that there is potential returns that you foresee in the future? 

And then, I mean, a reason why we have SRIs for each portfolio is for people to easily align that with the core portfolios. So for me, I am a high risk investor. So I have actually in my portfolio 36% SRI, then I actually match that with the thematic portfolios as well. But I mean, everyone is different. And I don't think we would advocate for anyone to just put everything into thematics. But it's a good way to spice up your portfolio.

Freddy: I believe the personal values must be aligned, right? I mean, I have to believe that Technology Enablers as a theme is truly going to change the world [24:00] around us. If it's not, why would I invest in it? 

So I think we're not here to sell our users anything, we just want to give them more choices that make sense. That’s sensible from the financial plans perspective. 

But the user ultimately has to be the one that says, I like this theme, I believe in it, and I want to do it, and I've read up on it, I've researched and I follow it. I mean, you're ultimately responsible for your own investment. So in the case of themes, I think the more so - the user has to be engaged.

Philipp: Yeah, absolutely. You have to be excited about it, right? You have to, you know, fully support the theme. And then, like he said, I also think about having a longer time frame, when you invest in themes. These are called themes for a reason, right? A theme that will develop over years’ time. 

So if you believe in it, have conviction, stay the course right? Because it will be more rocky than the normal portfolios. But in the long term, it should be paying off nicely on the reward side as well. 

Freddy: That’s a very good point Philipp, by the way, sorry, I chimed in. Because I get this a lot. Look, a lot of people say well, the theme looks like in the price chart, it looks high right now, like whether I should invest in it. 

And my response tends to be if you cover the cut off the graph from the last 10 years, and pretend the 10 years ago was today is also the highest point in history. You can keep going left. 

It's always going to be the highest point when you never invest, especially with these futuristic disruptions and futuristic exponential growth. 

That’s in the pipe, the chart would never tell you and, however, to be real to the user, any one of you who's worried about the chart, the dollar-cost averaging approach became even more relevant. You want to smooth out those noises. If you're concerned, just have a plan like any normal plans that you have with us. [26:00] Just averaging over 6 months or 12 months, it’s a long term thing you should really also take time to build your portfolio.

Philipp: Absolutely. This has always been my approach. Always when I tell friends, because it always comes up and we've been here for too long, and you know, it always comes up and they ask: Yeah, but now I don't want to invest, because now the market is too high, right? Because oh, 2000, you know, like, can't be going any higher.  

There was COVID and everything still went up, right? So I think that you drill down the point again, but especially when it comes to these themes, like you said, like Technology enablers, Future of Consumer Tech, Healthcare Innovation, the names of them already, right? What they stand for is the future. 

So you're taking a step now, and for payout in like 10 years time. To me, always, when I do my investments, I always say, hey, will I be holding this in 10 years time? Is Amazon gonna be better positioned in 10 years than today? Yes or no? If it's a yes, then yes, why not invest in it, right? 

I’m thinking like this, and like you guys both explained, it’s really the key here, when you look at adding these themes to your personal financial plan. 

Stephanie: I really like Freddy's point about not looking at charts, because a lot of people just tend to focus on the charts. And I mean, that leads to a lot of short-term trading, which I mean, we all know, we've all done it. It just destroys more value than adds value, right? I think we've all gone through that passage. And I think sometimes you need to keep perspective. 

For example, if thematic ETFs are still at a very, very early stage, right? Like the companies that make them up or make up, like make up these ETFs. And if you look at, for example, like thematic ETFs as a whole in the US, it's only 2% of the overall US ETF market cap, and even though they've grown twice, like 2 times in the past 4 months. So we are in a very early stage. [28:00] And actually, I would think we're in a sweet spot of like starting to launch a thematic portfolio because of that. 

Philipp: Yeah. No, thank you. Thank you for telling us about those numbers. It was pretty interesting that whole thematic portfolio landscape. 

Before we wrap it up, I know you gave some teasers of new thematics coming out over the next few quarters. Is there any one particular one that you can already share? That might be coming out, or any particular favourite, you know, theme that even if it might not come out with us at StashAway, that you're interested in? 

Freddy: Well, there's so many things I love but I can give you a teaser, which is, you know, we have an energy outage - some pressure in energy markets, but we felt there is a technological solution one day. So that's my hint.

Stephanie: I am just going to kind of dodge the question by saying that if any of our audience have any good suggestions, or if you want to see any themes that appear. I mean, feel free to write in and let us know. We'd love to learn.

Philipp: No, absolutely, yes. So yeah, all of our listeners, because they've been with us now, a lot of them for a year and a half, they learned a lot about different sectors. So yes, please, you know, please send us an email to podcast@stashaway.com if you do have any, any suggestions about what you want to see on our thematic front?  Within StashAway, it's a really, really exciting space. And I think, you know, you guys have done an incredible job in creating these portfolios and giving investors actually easy access to them, because I think that's what all about the struggle has been before, right? You buy maybe one ETF, but you guys have created, you know, a theme with multiple ETFs with lots of diversification within the ERAA® framework. So it's a really exciting topic. [30:00]

So I'm sure I'll have you both on again, when we talk about more new thematics portfolios coming in.  I know I might even have one of you or both back with some of the fund managers that we talked about today. 

I think we are in talks with some of them to come on to the podcast to dive a little bit deeper into each particular sub theme within the theme, right? To learn more and you know, really get the gist of each of their strategies on how they choose and why they invest in certain companies, particularly individual companies at that level. 

So again, both of you - really good chatting again, and it was so nice being together again on the podcast, so thank you both for your time.

Episode notes

In this episode, Freddy and Stephanie share how you can invest in the up-and-coming innovations that can change the world, from blockchain technology to gaming, and robotics to biotech. Learn all about thematic investing’s exponential growth and how you can include Thematic Portfolios in your financial plan. 

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Also, our lawyers would want us to tell you that the opinions of our guests are not necessarily shared by StashAway, that past performance is no guarantee of future results, and that what you heard is not investment advice.

Episode contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Freddy Lim (Co-founder and CIO at StashAway)
  • Stephanie Leung (Group Deputy CIO at StashAway)