As
part
of
our
thematic
investing
week,
we
spoke
to
three
fund
managers
about
how
to
manage
the
hype
cycle
that
tends
to
follow
hot
themes.
Managers
at
Schroders,
Janus
Henderson
and
Baillie
Giffford
share
their
experiences.
Ever
been
on
a
rollercoaster
ride?
You
feel
a
wave
of
suspense
as
you
are
taken
slowly
up
to
the
top
of
the
track.
The
wheels
of
your
cart
then
pause
for
a
moment.
Your cart
then
tips
ever
so
slightly
leading
you
to
a
cascading
fall,
hands
flown
into
the
air,
with
your
mouth
wide
open
screaming
in
a
mixture
of
fear
and
excitement.
Thematic
investments
offer
a
similar
ride.
With
soaring
highs
and
deep
lows,
fund
managers
allocating
to
sectors
to
tackle
the
most
pressing
issues
of
our
time
from
water
scarcity
to climate
change,
initially
enthuse
investors.
But
the
hype
cycle
eventually
ends
leads
to
disappointment.
So,
how
do
professional
thematic
investors
endure
the
ups
and
downs?
Are
Stocks
Post
Growth
or
Just
Normalising?
Alex
Monk,
portfolio
manager
of
the
Schroder
ISF
Global
Energy
Transition
Fund,
is
facing
a
challenging
period,
with
the
fund
recording
negative
total
returns
over
YTD
(-5.9%),
1
year (-19.42%),
annualised
two
years
(-8.11),
and
three
years
(-6.57%)
respectively.
Despite
current
forces
hindering
the
fund’s
returns
Monk
is
confident
that
investing
in
the
transition
to
renewable
energy
will
guarantee
investors
growth
in
the
long
term.
(My
colleague
Valerio
Baselli
has
looked
at
the
sector
in
detail.)
He
also
believes
that
current
lows
reflect
the
sector
returning
to
normalised
levels
after
the
exuberance
consumers experienced
in
the
pandemic.
“Everybody
was
stuck
at
home
spending
on
goods
rather
than
services,
so
people
were
buying
EVs,
interest
rates
were
super
low.
That
made
funding
a
lot
of
these
purchases’
extra
easy.
And
there
was
short
term
policy
support
and
subsidies
for
some
of
these
technologies,”
he
tells
Morningstar.
“So,
what
you
ended
up
with
was
a
situation
where
the
adoption
of
some
of
the
consumer
parts
of
the
energy
transition
skyrocketed
well
above
the
normalised
structural
growth
trend.”
Market
Exuberance
for
Renewables
Soaring
demand
was
also
accelerated
by
Russia’s
invasion
of
Ukraine
which
brought
energy
security
to
the
forefront
of
geopolitics
increasing
the
demand
for
green
energy
alternatives.
“What
we
then
saw
at
the
end
of
2022
was
some
of
those
positive
cyclical
forces
starting
to
ease
off
a
little
bit.
But
all
the
market
sees
are
downward
revisions
to
earnings,
and
it
looks
like
demand
in
some
of
these
areas
is
falling
aggressively
and
earnings
are
starting
to
fall.”
“These
companies
start
to
be
looked
at
as
ex
growth,
but
all
you
are doing
is
normalising
back
to
trend
after
the
period
of
excessive
demand
to
a
more
normalised
level
and
then
the
structural
forces
of
adoption
will
start
to
take
place,”
he
said.
Yet,
Monk
remains
optimistic
arguing
that
investors
should
pay
close
attention
to
various
thematic
funds,
where
valuations
of
companies
are
trading
well
below
where
they
were
in
2019
during
the
height
of
the
market’s
exuberance
for
renewables.
“A
lot
of
these
businesses
are
much
bigger,
much
more
cash
generative,
with
healthier
balance
sheets
than
they
were
in
2019.
But
the
valuations
are
below
where
they
were
in
2019.
So,
on
a
forward
basis,
the
risk
reward
is
interesting.”
“If
you
go
back
to
the
dot
com
bubble
in
2000
and
you
look
at
what
happened
to
PC
and
mobile
sales
after
the
bubble
burst.
The
decline
was
in
the
short
term
but
that
did
not
change
the
broader
long
term
structural
shift
towards
PCs
and
using
mobile
phones.
What
we
care
about
is
the
long-term
structure
and
that
is
ultimately
where
we
are
going
to
capture
returns.”
Funds
Built
Around
Themes
For
Alison
Porter,
portfolio
manager
of
the
Janus
Henderson
Sustainable
Future
Technologies
Fund,
thematic
funds
often
struggle
to
navigate
the
hype
cycle
because
they
struggle
to
fulfil
their
end
market
theme
by
finding
profitable
businesses
to
invest
in.
“You
see
a
lot
of
funds
which
are
designed
around
the
idea
of
the
end
market
or
simply
of
looking
at
a
problem.
The
theme
means
they
often
must
find
40
to
50
stocks
that
in
some
way
align
with
the
theme,”
Porter
tells
Morningstar.
“And
how
we
look
at
managing
technology
is
that
we
look
for
not
just
companies
who
have
these
positive
end
markets
but
also
companies
that
have
a
business
case.”
For
Porter,
in
a
hype
cycle,
investors
can
identify
a
problem
or
a
growth
area
which
leads
to
substantial
capital
flows.
But
often
the
spaces
are
competitive,
and
companies’
valuations
become
unsustainable
and
later
unwind.
Janus
Henderson’s
Sustainable
Future
Technology
Fund
is
one
of
the
UK’s
best
performing
thematic
funds,
reporting
a
positive
return
of
YTD
(10.72%),
1
year
(29.40%)
and
2
years
(12.27%),
benefiting
from
the
bull
run
in
the
technology
sector.
She
says
that
thematic
investing
is
cyclical
with
lofty
heights
and
disappointing
lows
almost
guaranteed
when
investing
in
innovative
and
growth
led
sectors.
Healthcare
Investing
and
Technology
However,
Julia
Angeles,
portfolio
manager
of
the
Baillie
Gifford
WW
Health
Innovation
Fund,
is
sceptical
of
the
idea
of
cyclicality.
In
the
case
of
healthcare,
Angeles
is
targeting
businesses
that
are
converging
healthcare
needs
with
the
development
of
new
technologies.
In
her
view,
structural
drivers
underpinning
healthcare
have
not
changed
but
what
has
ebbed
is
the
way
markets
perceive
innovation
in
the
space.
“Moderna
for
example
has
a
very
exciting
vaccine
against
cancer,
it
is
called
the
personalised
cancer
vaccine,
which
already
has
very
strong
data.
So,
it
is
not
just
hypothesis,
it
is
going
to
work.
The
first
product
is
for
melanoma,
and
it
does
magic
for
those
patients
who
have
no
other
options.”
“But
the
market
is
really
struggling
to
attach
any
value
to
the
cancer
franchise
of
Moderna
because
it
is
still
not
on
the
market,”
she
says.
The
healthcare
sector
came
into
focus
during
the
coronavirus
pandemic,
but
this
led
to
a
distortion
in
the
demand
for
certain
products
–
and
displacement
of
others.
Whilst
inflation
and
higher
interest
rates
made
access
to
capital
more
restrictive
for
businesses.
This
backdrop
contributed
to
the
fund’s
spate
of
losses,
with
a total
return
rate
of
–2.47%
(YTD),
-15.04%
(1
Year),
-14.13%
(two
years
annualised),
and
–15.46%
(three
years).
Yet,
Angeles
believes
that
health
care
has
been
mainly
hit
by
the
market’s
perception
of
the
space.
“The
value
attached
to
innovation
is
negligible,
almost
zero.
The
market
only
values
what
it
can
see,
but
it
cannot
really
value
anything
like
the
potential
of
a
company.
But
the
key
message
here
that
is
innovation
is
on
sale
in
the
current
environment.”
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