Not your average thematic strategy

What are the main demographic changes the world is experiencing?

The world’s population continues to grow by around 70 million every year. It exceeded 8 billion in 2022 and is expected to reach 9 billion by 2037, according to the United Nations. This growth, combined with changing consumption patterns, is fuelling demand for natural resources, and should generate a 35% increase in demand for food, 40% for water and 50% for energy by 2030, according to the World Bank.

What’s more, the global middle class is growing, particularly in Asia, and 1 billion Asians are expected to be part of it by 2030, making Asia the world’s biggest consumer.

Urbanization is also progressing: more than two-thirds of the world’s population is expected to live in urban areas by 2050, according to the United Nations.

Finally, the aging of the population is creating challenges for the labour market and social and healthcare systems. These developments have all kinds of impacts on the planet, and also generate numerous investment opportunities.

How does Candriam’s demography strategy exploit these themes?

We’ve designed this strategy to be broad in scope so it can exploit a lot of aspects that demographic changes are resulting in. So, for instance, with a growing population, the world will need more resources, and investing in energy might be a logical way of exploiting this. At the same time there’s a need to minimise climate change and destruction of the planet, so we look for fi rms that can lessen people’s impact on the environment. Water treatment companies, for example. We capitalize on ageing populations mainly through healthcare stocks, but also through the kind of leisure activities that older people enjoy. Cruise liners

would be one such possibility, al though we haven’t invested in any as yet. And we play the emerging consumer through global brands that are seen as highly attractive in emerging markets, such as quality food companies and luxury goods firms..

What does the strategy look like?

It’s a global equity strategy that primarily invests in large, well-known firms and has a slight bias towards quality – we won’t invest in a firm with a bad balance sheet. We’ve identified a number of themes linked to demographic changes: natural resources, urbanisation, sustainable development and environment, healthcare, healthier lifestyles, pensions and savings, consumption in emerging markets and changing consumer habits (including digital). At least 30% of any holding’s sales must be linked to these themes. It’s a high conviction strategy holding maximum 70 stocks[1], but we try to minimise its volatility as much as possible through exposure to a broad number of themes and by avoiding small caps wherever possible. While we look to exploit themes in emerging markets, we generally favour developed market stocks that are doing so as a way of achieving this goal, and the limited exposure to emerging market currencies this results in again reduces the volatility. In addition, ESG[2] criteria are incorporated into our investment process. We assess the exposure of companies’ activities to key sustainability themes and stakeholder management.

Is the strategy bottom-up[3] or top-down[4]?

We’re very much bottom-up, but if that results in a country or sector allocation that isn’t very well diversified we’ll look to see if it’s in synch with the macroeconomic backdrop and might make some tweaks accordingly. For example, if our bottom-up analysis results in a 60%

allocation to defensive consumer staples names at a time that the global economy is accelerating, we’d underperform the MSCI World© massively. So we’d tone down that bias but not completely reverse it, as bottom-up is always most important.

We never prefer one theme to another. For example, we won’t say this year we prefer ageing populations, while next year we’re likely to prefer urbanisation. The themes we invest in are all long term and it’s impossible to time them accurately.

What are Candriam’s credentials in managing this kind of strategy?

Candriam has been involved in thematic investing for over 20 years and has built up over USD 11.1 billion of assets (at end 2023) in thematic strategies over this time. We know the pitfalls such strategies can involve, and that’s why we make sure the fund will never be too

exposed to one country or sector. We’ve seen how some thematic funds can have a very narrow focus, leading to highly volatile returns, and that’s why we’ve set this one up to have a much broader scope and to be able to adapt to the macroeconomic backdrop.

What sets your strategy apart from others on the market?

One of the things we’ve done is make it as broad based as possible to avoid excessive concentration. So while many other demography strategies concentrate on ageing, we’re also heavily exposed to other themes such as consumption in emerging markets. That means our strategy shouldn’t have boom years and bust years like many other thematic strategies.