There are more than 3,000 companies underlying the MSCI All Country World Index (ACWI), each with a story to tell, but Kiwi Invest portfolio manager, Nathan Field, isn’t interested in hearing their plot details.
For Field, who runs the $1.6 billion Kiwi Invest Global Thematic Fund, stock-specifics come secondary to the overarching investment idea.
“For example, we don’t have to meet the management of companies we invest in,” he said. “Once we’ve decided the themes, the names almost pick themselves.”
Of course, there’s much more to the investment process than that, including a strong quantitative modeling system, but it’s the themes that call the tune; the maths simply define the melody.
“There’s lots of numbers crunched by [quantitative] investors, especially in the large cap global markets, and for us to crunch more numbers probably wouldn’t add much alpha,” Field said. “It’s the subjective stuff where we can add value – like keeping ahead of consumer trends and industry competitive dynamics. The thematic ideas emerge from our analysis; the quant comes later.”
Fundamentally, the Kiwi Invest thematic strategy is keyed to identifying companies likely to report positive “earnings surprises” in the short- to medium-term as previously under-appreciated trends unfurl.
In a new paper explaining the approach Kiwi Invest says the thematic team “is constantly on the lookout for trends and patterns that we think the market is missing”.
“We might uncover a new trend during a quarterly earnings season, or from reading a product review on a technology blog, or by observing consumer behaviour at the shopping mall,” the report says. “We don’t place any limitations on where a theme comes from, provided there is a clear path to monetisation and our ESG criteria are met.”
But while the team of three (comprising Field along with analysts Frank Braden and Johnson Weng) takes a free-range attitude to theme-gathering, corralling those ideas into real investment strategies requires some focusing.
“A common thematic strategy is to invest in themes that are long-term and well-known, such as ‘aging demographics’, ‘cloud computing’ and ‘green energy’. However, these themes are often too vague to be meaningful to our process, given we are seeking companies that are likely to beat earnings expectations over the next twelve months,” the paper says.
“Timing is critical for performance – therefore our themes are significantly more targeted, focusing on specific trends that are relevant to the current trading environment.”
Currently, the Kiwi Invest fund is following about 25 themes expressed through 100 plus large cap global stocks. Field said, for instance, that the strategy has highlighted cancer drug producers as one potentially lucrative sub-set of the aging population trend.
“We don’t think aging demographics will benefit all companies that service the market – we target the themes underneath that we have confidence in such as [companies with treatments for] diabetes, oncology or those that manufacture cardio-vascular devices,” he said. “Our view is that some companies can benefit from these thematic tailwinds with an earnings upgrade in the next 12 to 18 months.”
The constant rotation within and between themes does result in a relatively high annual portfolio turnover for the Kiwi Invest thematic fund of about 150 per cent.
However, Field said as the fund deals only in large, liquid global stocks (with an average market cap of about $80 billion), the cost of trading is “very low”.
“We’re very active, and always 100 per cent invested, but in the global large cap stocks there’s no spread to worry about and broker commissions are pretty low,” he said.
Since launching as a standalone wholesale fund in 2018, the thematic fund has returned about 22 per cent, almost double the ACWI benchmark. But the strategy itself has a longer back-story dating back to the Kiwi Invest origins in the Gareth Morgan Investment (GMI) house.
Field joined GMI about 10 years ago, remaining in situ when Kiwibank purchased the group in 2012, to help run the-then global equities strategy.
“Gareth always had a thematic approach but the themes back then were broad – like ‘technology’,” he said.
Under the new ownership structure, Field refined the thematic approach in 2013 to its current mode, accruing an annualised performance since then of just over 16 per cent compared to 11.4 per cent for the index.
In 2018, Kiwi Invest (formerly housed in Kiwi Wealth) launched the thematic fund as part of a new suite of wholesale portfolio investment entities. About two-thirds of the thematic fund’s $1.6 billion under management comes through the associated Kiwi Wealth KiwiSaver scheme with the remainder sourced from the group’s private client network.
Matthew Laing joined Kiwi Invest late last year from Salt Funds to spearhead sales in the wholesale market for the group’s range of products.
Last week, sister company, Kiwi Wealth, also published the 2020 iteration of its annual ‘State of the investor nation’ report that found a large upswing in savings and investment in the wake of COVID-19 disruptions.
Melissa Vasta, Kiwi Wealth acting head of retail, said in a release that: “The data shows a significant increase in the number of changes to investments from March to June. Close to a quarter of those with investments made a change to their investment, which is what we would usually expect over a full year.
“People were putting in more money into their investments rather than reducing it which is very good to hear. In fact, fewer were withdrawing money from their investments compared to February
“That shows people have been paying attention to their investments. The critical thing is are they making good decisions to achieve their financial goals?”
Vasta stepped into the interim head of retail role in April following the departure of Joe Bishop.