Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Thematic investing is an alluring concept to many long-term investors. Investors need only to be sure of a theme and then pick their moment (or average in) and let compounding do its thing. The best themes for long term investors should have a degree of permanence and ubiquity, offering a strong, sustained tailwind to returns.
Of course, investing in a theme through single stocks exposes investors to specific risks that an individual company may or may not be able to capture the benefits of the theme or that management score an own goal despite the secular growth opportunity. That said, it is also rare for a single company to be able to retain its competitive advantage over many years, with innovation and disruption from competitors potentially eroding the investment case for any particular stock.
Therefore, in investing in single stocks to express a theme, one has to be very lucky or chop and change over time as the competitive environment changes. Selling shares to recycle capital within a theme potentially exposes investors to one of life’s inevitabilities – tax. Investing in a fund or investment trust exposed to a theme gives the best of both worlds – an actively managed and diversified exposure to the theme, as well as deferment of capital gains tax until the share or unit is sold. In this way, investment trusts help with the deferral of capital gains taxes, but it would be a bold claim that they can help with the deferral of the other of life’s inevitabilities. That said, several trusts do seek to benefit from humanity’s propensity to spend in an attempt to defer death (and other, more minor ailments) and from our ingenuity and innovation in developing solutions to health issues.
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