- Gertjan van der Geer says megatrends are shifts that have significant impact and occur over decades.
- To avoid getting sucked into hype cycles, several megatrends need to converge to create a fund.
- These are the top 10 stocks across the firm’s 12 thematic funds.
Investing in trends can be entertaining and even profitable. This year, artificial intelligence stole the show and captivated investors’ attention, prompting them to pile into companies that indicated they were incorporating the technology into their operations.
The AI hype sent stocks in the magnificent seven soaring: Nvidia (NVDA), Meta (META), Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Tesla (TSLA).
However, those trends can be fleeting and be followed by a painful drop, especially if they are overhyped, as crypto was in 2021, or hyped too early, as many internet stocks were before the dot-com bubble burst in 2000.
Investing in trends is similar to riding a wave. The best waves to ride are those that are caught just in time, not too early or too late. Finding the right trends is a time-consuming process that requires extensive due diligence and market research. Pictet Asset Management, a firm with $250 billion in assets under management, tries to do just that. The firm has 12 main strategies in funds based on megatrends.
Megatrends, according to Gertjan van der Geer, a senior investment manager at the firm, are large social, economic, political, environmental, or technological transformations that have a significant impact on the economy, society, cultures, or businesses. These are major global shifts that can take decades to occur.
Several megatrends must converge to support the creation of a thematic fund in order to avoid being sucked into short-lived hype cycles.
Van der Geer also stated that five criteria must be met before Pictet creates a thematic fund. Having a material link between the megatrends and the universe’s companies, which he defines as companies that benefit materially from the trends, is one of them. These firms must be large and liquid enough to warrant active management. There must be minimal overlap with the firm’s existing strategies. The universe of companies must have a risk/return profile that outperforms global indices such as the MSCI index. Finally, the firm must have the right people to manage that portfolio.
When it comes to selecting the right basket of stocks, van der Geer emphasizes the importance of a company’s fundamentals. Many of the stocks in the firm’s funds are heavily weighted toward mid-caps because they have higher, more focused exposure to the specific trend than their larger-cap counterparts.
To determine whether a company can gain market share over time, he says it must have a sustainable competitive advantage. And, in order to do so, the cash flow return on investment (CFROI) should be high enough to allow the company to reinvest in growing its business, allowing it to gain market share faster.
“We are high-quality, profitable growth investors.” And there are a few things in these companies that we are looking for,” van der Geer explained. “First and foremost, these megatrends support secular growth. Second, we want these businesses to gain market share over time. The third component is the valuation. We require valuation growth.”
According to him, this is a strategy that will take at least seven to ten years to implement. And, in order to capitalize on the full potential of megatrend gains, investors should aim to stay invested for several decades, possibly as long as 20 years, he said.
Megatrend stock picks
The stocks listed below are from the Pictet Global Thematic Opportunities fund, which he co-manages. It’s a best-ideas fund comprised of the top stocks from the 12 megatrend funds, listed in descending order of weight.
According to him, Visa (V) is the top stock in the fund because it has an exceptionally strong competitive advantage as a core component of international payments. This stock is a component of the funds Premium Brands, SmartCity, and Digital.
Thermo Fisher Scientific (TMO), one of the world’s largest life-sciences companies, is involved in both the research and diagnostic aspects of new medications. This stock is a component of the funds Water, Security, and Health.
According to Van der Geer, UnitedHealth (UNH), one of the largest health IT companies, is a great way to unlock system efficiency that benefits both the company and patients. This stock is a component of the Health and Human Capital funds.
Microsoft’s (MSFT) addressable market is expanding rapidly, particularly in artificial intelligence and gaming. This stock is part of a digital fund.
Schneider Electric (SBGSY) is a global leader in energy management and automation digital transformation. It contains devices that can boost energy efficiency. This stock is a holding in the Clean Energy fund.
“They sell a lot of electronic components and devices, mostly for buildings.” “Reducing unnecessary pollution is one of the most important ways to reduce our global CO2 footprint,” van der Geer said. “Better energy efficiency in homes, industrial and commercial sites is one of the best ways to do that.”
Novo Nordisk (NVO) is a pharmaceutical company that is a market leader in the diabetes field. He mentioned that they are one of the largest insulin producers. He added that they are still discovering new applications in areas such as treating obesity, reducing fatty liver disease, and lowering cardiovascular risk. This stock is included in the health fund.
Asml Holding (ASML) is the market leader in extreme ultraviolet machines, which are the best or highest-quality manufacturers of the most advanced chip-making machines. This stock is held by funds dedicated to robotics and clean energy.
Roper Technologies (ROP) manufactures a diverse range of products for the industrial, healthcare, and transportation industries. This stock is part of the water and security funds.
Kla Corp (KLAC) is a semiconductor industry supplier of advanced process control and yield management systems. This stock is a holding in the robotics and security fund.
Republic Services (RSG) is a provider of urban waste collection and recycling services. This stock is a component of the funds for smart cities, nutrition, and water.