BlackRock has a view of what the world will look like in 30 years’ time and is putting its money where its mouth is by expanding its thematic exchange-traded fund (ETF) range.
The firm has highlighted five ‘megatrends’ which it says will ‘change the world’: shifting economic power; climate change and resource scarcity; rapid urbanisation; and demographics and social change, all of which will be underpinned by technological breakthroughs.
BlackRock predicts that China could become the new world superpower by 2030, with India rivalling the US by 2050, and businesses potentially becoming more powerful than countries.
It estimates that if predictions are correct, by 2100 the world will be 5.8 degrees hotter on average than the late 19th century, making the planet’s resources increasingly scarce.
This will lead to Western diets becoming increasingly plant-based. Renewable energy will fully replacing fossil fuels and there will be technological advancements yielding fully man-made materials.
BlackRock envisages two thirds of the world’s population living in urban areas by 2050, with a third of the population of 55 countries being over 60 years old by that time. The global population will also rise by over one billion by 2030.
To cope with all these changes, the company predicts that at least a third of the activities carried out by people in 60% of job types will
be automated, with machines learning faster than humans and personal data being a valuable commodity.
These are themes that thematic ETFs can exploit by investing in a basket of companies which, in theory, are primed to take advantage of long-term structural changes.
According to data from ETFGI, at the end of 2016 there were $77.9 billion (£58.7 billion) of assets in thematic ETFs, with the number available more than doubling over the last five years.
Rob Powell, an investment strategist in BlackRock’s iShares Capital Markets team, said it is all about investing in companies which are primed to take advantage of structural trends over the next 20-30 years, rather than over a business cycle.
He said: ‘It’s a really nascent area, but one we are pretty excited about. Companies that have these long-term stories, and suggest they are going to be more profitable in the future, have actually done really well in the short-term.
‘There’s strong construction built in [to the ETFs]. We have screens in place so the fund is not going into stocks that are too small and too illiquid. And they’re all equally weighted in the index.’
BlackRock currently has four thematic ETFs – automation and robotics, breakthrough healthcare, ageing population, and digitalisation.
That last one, digitalisation, is a key area of focus for the firm, with its ETF focused on firms that can capitalise on the integration of digital technologies into ‘every area of life’.
Powell revealed: ‘We have an internal saying at BlackRock, “whatever can be digitalised will be digitalised in the next three to years”.’’
He also highlighted ageing populations as an overlooked area of growth, and noted the ‘ageing’ US economy is the third largest in the world behind China and the US economy as a whole.
‘There is evidence of people’s consumption changing as they age, so our product is designed to provide exposure to companies which can benefit from these trends – cruise ship companies, golf companies for example, and also the life assurance companies.’
Powell said demand for thematic ETFs has come from the ‘huge growth’ in wealth managers, both in the UK and across Europe, ‘looking more towards the long-term and wanting that thematic exposure in their portfolios’.
‘Our more sophisticated clients, wealth managers, love being able to tell a story to their clients, the end investors. It’s more relatable than what’s happening in equity markets for example,’ he said.
‘People read about these trends in newspapers and they want exposure to them. There’s unprecedented demand for these megatrends from the bottom up.’
More and more wealth managers are advertising a tilt in their portfolios towards thematic investing.
Mattioli Woods said at the beginning of the year that it has increased its use of thematic investing to 34% of clients’ portfolios as it looks to add value, while East Sussex-based Skerritts Wealth Management said it moved away from geographical investing altogether in early 2015 and now invests completely from a thematic or macroeconomic perspectives.
BlackRock will launch more funds to its four-strong thematic ETF range this year as it looks to keep up with demand, having seen
$1.7 billion of inflows into its current thematic ETFs so far this year.
Powell said: ‘We are trying to launch products for where wealth managers see demand from the end investors.
‘The pace of technological change, we think that it’s going to happen exponentially instead of the linear way that it’s happened in the past. There’s huge amounts of evidence these things happen faster than expected.
‘So from there we plan to launch more ETFs that can benefit from the effects of those changes.’