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How can differentiate between trends and fads? CIO grounds its long-term thematic investment advice in three inescapable forces, and believes these long-term trends should play out regardless of the business cycle. (ddp)

Longer-term Investments The pitfalls of thematic investing

14 March 2019, 7:31 pm CET, written by UBS Editorial Team

Little more than a decade ago we did not have smartphones. Now 77% of Americans carry the computing power of the entire Apollo space program in their pockets with them every day. The pace of change makes investing for the long term a difficult feat.

Thematic investing strategies, such as the Chief Investment From an investment perspective, CIO is focused on Office (CIO) Longer-Term Investment (LTI) series, seek to problem-solving companies that are meeting the needs of derive investment opportunities based on well-entrenched a changing world. secular trends that it believes are influencing the demand for goods and services over coming decades. The disciplined CIO's structured approach to LTI helps avoid short-lived, approach CIO applies helps to navigate the complexities of overhyped opportunities. longer-term thematic investing. Being too early Below are common pitfalls of thematic investing strategies There is rarely a first-mover advantage when it comes to and how CIO has tailored its approach to avoid them. disruption. An example of disruptive technology that we've highlighted as being in a very early stage is ride-hailing, Chasing a fad which is still being defined, as many variables continue to To differentiate between trends and fads, CIO grounds its evolve. Until there's greater clarity on regulatory, liability, thematic LTI advice in three inescapable forces and believes and consequences, it will be difficult to choose winners these long-term trends should play out regardless of the in this space. business cycle. • Population: By 2050, the global population is expected All eggs in one basket to reach 10 billion. CIO advises being careful with single-theme approaches; a • Aging: By 2030, those aged 60 and over will diversified theme approach can help reduce volatility long outnumber those 25 or younger in developed term. If a single-theme approach is taken, the rest of the countries. portfolio should be assessed in relation to the concentrated • Urbanization: By 2050, it's expected that 68% of the thematic exposure to determine an appropriate asset world's population will live in cities. allocation to balance risk and reward. UBS Investment Insights For UBS marketing purposes

Improper due diligence A company could be exposed to an attractive theme, but that doesn't automatically mean it's a good investment. When looking for companies to buy and hold long term, it's important to consider its sustainability profile – governance structure, resource efficiency, culture – in addition to financial characteristics. This is critical when assessing entrepreneurial companies at the forefront of innovation.

Selling too early Loss aversion ranks high among investors' behavioral biases. As a result, the temptation is high to walk away from long-term ideas that temporarily underperform. Similar to traditional investment strategies, where market timing typically leads to underperformance, CIO advises against jumping in and out of long-term thematic investments.

A diversified thematic strategy can help reduce drawdowns when single themes underperform, as companies with exposure to various themes can be emphasized/de- emphasized depending on the market environment. When a theme underperforms, CIO reviews its thesis to understand if it has changed in a material way, or if headwinds will prove temporary.

For more: The Pitfalls of thematic investing, 13 Mar. 2019.

Authors: Laura Kane, Michelle Laliberte

Content is a product of the Chief Investment Office (CIO).

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