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. Hopping on trends can be fun and even very profitable. This year, artificial intelligence stole the show and captured investors’ imaginations, causing them to pile into companies that signaled they were incorporating the technology into their businesses.
The AI hype sent stocks within the magnificent seven soaring: Nvidia (NVDA), Meta (META), Amazon (AMZN), Microsoft (MSFT), Apple (AAPL), Alphabet (GOOGL), and Tesla (TSLA) carried much of the S&P 500’s gains this year.
But those trends can be short-lived and followed by a nosedive that hurts, especially if they’re overhyped like crypto in 2021, or hyped too early like many internet stocks were before the dot-com bubble burst in 2000.
Investing in trends is like surfing a wave. The best rides are on the big waves that are caught just in time, not too early and not too late. Finding the right trends is a long process that involves deep due diligence and market research. It’s what Pictet Asset Management, a firm with $250 billion in assets under its watch, tries to do. The firm has 12 main strategies in funds that are built around megatrends.
Gertjan van der Geer, a senior investment manager at the firm, describes megatrends as large social, economic, political, environmental, or technological transformations that significantly impact the economy, society, cultures, or businesses. These are major global shifts that can occur over decades.
To avoid getting sucked into short-lived hype cycles, several megatrends need to converge to support the creation of a thematic fund.
Additionally, five criteria must be met before Pictet creates a thematic fund, van der Geer said. They include having a material link between the megatrends and the companies in the universe, which he defines as companies that benefit materially from the trends. These companies need to be broad and liquid enough to warrant active management. There must be a limited overlap with the existing strategies the firm manages. The universe of companies needs to have an expected risk/return profile superior to global indices such as the MSCI index. And finally, the firm needs to have the right talent to manage that portfolio.
When it comes down to picking the right basket of stocks, van der Geer noted that a company’s fundamentals are key. Many of the stocks within the firm’s funds are heavily weighted toward mid-caps because they tend to have higher, more focused exposure to the specific trend relative to their larger-cap peers.
To gauge whether a company can gain market share over time, it must have a sustainable competitive advantage, he said. And for that, cash flow return on investment (CFROI) should be high enough to allow the company to reinvest into growing its business, allowing it to capture market share faster.
“We’re really high-quality, profitable growth investors. And there are a few things that we are looking for in these companies,” van der Geer said. “First of all, obviously, secular growth supported by these megatrends. Second of all, we want these companies to gain market share over time. And the third part is the valuation. We need valuation upside.”
This is a strategy that requires at least seven to 10 years of commitment, he said. And to capture the full opportunity of megatrend gains, investors should aim to stay invested over several decades, for as long as 20 years, he said.
Megatrend stock picks Below are 10 stocks pulled from the Pictet Global Thematic Opportunities fund, which he comanages. It’s a best-ideas fund made up of the leading stocks from the 12 megatrend funds, listed in order of weight.
Visa (V) is the top stock in the fund because it has an exceptionally strong competitive advantage as part of the core of international payments, he said. This stock is part of the Premium Brands, SmartCity, and Digital funds.
Thermo Fisher Scientific (TMO), one of the world’s largest life-sciences companies, plays an important part in the research for new medication and is an integral part of the diagnostic side as well. This stock is part of the Water, Security, and Health funds.
Van der Geer said that UnitedHealth (UNH), one of the largest health IT companies, is a great way to unlock efficiency in the system that benefits both the company and patients, he said. This stock is part of the Health and Human funds.
Microsoft’s (MSFT) addressable market continues to grow significantly, including in artificial intelligence and gaming. This stock is from the digital fund.
Schneider Electric (SBGSY) is a global specialist in the digital transformation of energy management and automation. It has devices that can improve energy efficiency. This stock is part of the Clean Energy fund.
“They’re selling an enormous amount of electronic components and devices mainly for buildings. And one of the key ways to improve our CO2 footprint globally is to reduce the unnecessary pollution,” van der Geer said. “One of the best ways to do that is through better energy efficiency and within the homes, industrial and commercial sites.”
Novo Nordisk (NVO) manufactures pharmaceutical products and is a market leader in the diabetes field. They are one of the largest insulin producers, he noted. They continue to find new applications in areas such as treating obesity, reducing fatty liver disease, or lowering cardiovascular risk, he added. This stock is part of the health fund.
Asml Holding (ASML) is dominant in extreme ultraviolet machines that are the best or highest-quality producers of the most advanced chip-making machines. This stock is part of the robotics and clean energy funds.
Roper Technologies (ROP) produces a wide range of products for industrial, healthcare, and transportation markets. This stock is part of the security and water funds.
Kla Corp (KLAC) provides advanced process control and yield management systems to the semiconductor industry. This stock is part of the robotics and security fund.
Republic Services (RSG) is an urban waste collection and recycling services provider. This stock is part of the smart city, nutrition, and water funds.