As an advisor, you know that there’s a strong correlation between client engagement and business growth. When engagement is high, clients are far more likely to drive growth by making referrals. Being able to identify and offer the right portfolio strategies can help advisors not only deliver better client outcomes but also build more meaningful relationships.
Several new investment options are gaining traction because they enable advisors to connect with their clients at the point where their interests intersect with their investments. For investors, these strategies can help them achieve their financial goals while also addressing their concerns, passions and convictions. For advisors, these tools can open new opportunities to deepen their client engagement and grow their business.
Impact investment strategies offer this engagement by aiming to intentionally and positively impact the environment and society at large while also generating financial returns. With a market currently valued at $77 billion, according to a survey by the Global Impact Investing Network, impact investment products enable investors to identify opportunities and manage risks while assessing the environmental, social and governance (ESG) factors of a given fund or enterprise.
Passion investing, an allocation strategy aimed at high-net-worth investors, is a strategy that makes portfolio choices not simply for potential capital appreciation, but also for collectability and personal enjoyment. Art, jewelry, watches, rare coins and classic automobiles are among the asset categories that may offer diversification, asset protection and a return on investment, while also allowing people to invest in things they know well and care deeply about. These “investor-collectors” seek opportunities that may yield a decent return over the long term, and give them pleasure in the meantime.
Thematic investment funds are emerging as another tool for investors seeking to follow their passions and move beyond traditional style boxes. Building on the growing popularity of impact and interest-based investing, thematic investment strategies aim to provide exposure to companies playing a role in the demographic and consumer shifts that are changing the investment landscape, as well as the world we live in.
This is an approach that uses macroeconomic themes — like organics, renewable energy, new technologies, or health and wellness — to identify investment trends and opportunities. This broad strategy can potentially reduce portfolio risk, enhance returns and provide investment flexibility by diversifying portfolios away from the standard index-based investments. According to a recent survey by SourceMedia Research, close to 70% of advisors are either using these strategies or contemplating them. Furthermore, advisors who use these strategies report that 68% of their clients are either including or interested in including theme-based investments in their portfolios, the report found.
What Is Thematic Investing?
By their very nature, financial markets are focused on the present, on what is happening right now, but it’s the long-term forces of change that will probably determine returns. Thematic investing goes beyond trendspotting to identify the socio-economic and political forces that permanently transform how we live and work. These catalysts of change can emerge from an invention or an idea, a reaction or a decision, but they create investable opportunities that are applicable over time and across global markets.
Henry Ford’s Model-T assembly line, which permanently changed manufacturing worldwide, or the birth of the microprocessor in 1968, which launched the Information Age, are examples of transformative ideas or inventions that served as catalysts for sustainable, long-term growth. The energy crisis of the 1970s and the first Earth Day in 1970 brought nationwide attention to the U.S. dependency on foreign oil and to the challenges of air and water pollution. Reactions to these events led to the development of the alternative energy industry and the push for green products and technologies.
Transformative factors can emerge overnight or over decades. For example, the birth of over 76.4 million children between 1946 and 1964 gave rise to the baby boom generation that became a socio-economic force for change. The full sequencing of the human genome, completed in 2003, changed the diagnosis and treatment of disease virtually overnight, and has revolutionized modern medicine, and potentially, our longevity.
The forces of change that are transforming our lives now and into the future should create similar opportunities for investors over the next several decades. Among the themes with investable potential are the need for long-term care for the elderly, an increased focus on health and fitness, treatments for the global obesity epidemic and a growing demand for organic products. Strategies based on these themes may allow investors to target companies that will benefit from the socio-economic and demographic forces that are shaping the world.
An Organic Approach to the Market
The use of naturally derived products has been on the upswing in recent years, as consumers seek to protect themselves and their families from the toxins and pesticides used in growing and preserving much of our food. From food and drink to cosmetics and other personal care items, organic products are moving rapidly into mainstream American life. Companies that may profit from this increasing demand for organic products include those that service, produce, distribute, market or sell organic foods, beverages, cosmetics, supplements and green packaging.
As of 2014, 84% of American adults buy organic food as awareness grows about the health and environmental benefits of these products, according to Consumer Reports. The U.S. organic industry has seen a tenfold growth in demand, with sales increasing from $3.6 billion in 1997 to over $39 billion in 2014. And demand for organic food doesn’t stop at home: 60% of U.S. consumers picked a restaurant because it offered organic or environmentally friendly choices on the menu, according to a report by the Organic Trade Association and National Restaurant Association.
Globally, the organic food market is projected to achieve a compounded annual growth rate of 16% through 2020. Grand View Research found that the U.S. exported over $550 million in organics in 2014, up from $412 million in 2011. This increasing demand is driving a shift in farming: Census data show that in 2015 there were roughly 19,500 certified organic farming operations, with more than 3,000 farms moving to organic products.
The global organic personal care industry, including natural cosmetics, hair care and skin care, is also seeing increased demand and is expected to reach almost $16 billion in revenue by 2020, according to Grand View. For skin care products, that represents a compounded annual growth rate of 9.8% from 2014 to 2020.