Companies or Trends?
Facebook announced that it’s planning to launch a dating service for its users, and shares of Match.com sell-off around 25% in intraday trading. Are markets over-reacting, or are there long-term trends that investors need to be aware of while investing?
Imagine a child born in 2000. She turns into an adult this year. Would she believe that Nokia was on the cover of Forbes with the headline “Nokia, One Billion Customers- Can Anyone Catch the Cell Phone, King?” She was seven years old then, and the same year Apple launched the iPhone. The key was to spot the trend of the switch to smartphones, which was a great opportunity.
How to construct future-oriented portfolios?
Is the traditional way of investing and analyzing your portfolio, by sector, geography, growth v/s value, etc., the only way to do it, or there needs to be another lens in these rapidly changing times.
We at Fincite explore other ways of looking at how we invest and what impacts our portfolio (learn more on our approach here). Rather than looking at companies as per which sector they are in or started out, our methodology focuses on which long-term trends they impact. This gives the client a different way to look at her investments, which is forward-looking.
We have created a database of long-term trends, which take into account economic, technological, demographic, behavioral, and environmental factors that we think will shape our future. We have categorized these into MegaTrends and SubTrends.
- A MegaTrend is a long term trend that gives rise to more niche trends e.g. Internet of Things (IOT) is a MegaTrend
- SubTrends are a part of the Mega Trend, like Wearable Technologies, Smart Home, Cloud Computing, etc. are a part of the MegaTrend IOT
By categorizing companies into trends, we will enable investors to analyze and invest in a better way. The investors will be able to see if their current portfolio benefits or is at risk from these trends, and which stocks will help them participate in trends that they are interested in.
How does this work for the investor?
The investor can invest in these trends depending on her sophistication, objective, and/or composition of her current portfolio. These could vary and we discuss some specific ones below:
- Trends can be incorporated into the portfolio to mitigate specific risks, like the impact of climate change, or demographic changes.
- Opportunistic trading, such as shorting traditional retail sectors in a country due to the entry of Amazon.
- Conviction and interest in a particular trend. Investors have researched, work in the trend, and believe that a certain trend will dominate and they will benefit by investing in it.
- Extracting alpha, in a traditional core-satellite portfolio, by adding some trends that have higher growth prospects but with added volatility- typically the satellites
With this in mind, we have constructed Trendindicies to give investors, investment opportunities to diversify asset allocation by offering an international investable opportunity set of equities representing trends. We need to be aware of what impacts our portfolio and benefit from it. To see but be blind to opportunities, is not being a smart investor- be smart, take advantage of trends.