Indexing Thematic Megatrends
The term “megatrend” was coined by US political scientist and author John Naisbitt at the start of the 1980s. It refers to powerful macroeconomic transformative forces that have a major impact on countries, businesses and societies around the world, disrupting the way products and services are produced, delivered and consumed. Such powerful forces typically tend to span business cycles, industries and geographies, creating a vicious cycle of sustained disruption resulting in structural shifts and irreversible transformations in the global economy, businesses and society. Megatrends are by no means a new phenomenon, with countries, industries and society all experiencing them, as noted by Naisbitt in his best-selling book by the same name.
However, thematic investing is a relatively new development in modern portfolio management that is driven by such megatrends. Although theme-based investing, e.g. in water utilities or infrastructure, has had its day in the sun in the past, thematic investing in its current form traverses geographies and industries/sectors with a forward-looking investment philosophy that typically focuses on the anticipated beneficiaries of a particular megatrend that has been identified. Driven by the disruptive power of innovation, thematic investing has gained in popularity and momentum over recent years from what may perhaps be considered to have originally been a bastion of a few well-informed active investment managers. STOXX has been at the forefront of bringing thematic investing to the mainstream, and has developed a suite of thematic indices that attempt to capture future megatrends using a transparent, systematic and rules-based approach.
In this paper, we discuss the STOXX approach to its family of thematic indices, familiarize readers with the data sources and the related index construction methodologies used to incorporate them, develop the concept and the rationale for each identified thematic, and analyze the resulting indices. This includes using basic index performance statistics and factor-based performance attribution1 to identify any drivers of risk and return, plus any unintended systematic biases within each index that investors may need to be aware of whilst making investment decisions.
1 Performance attribution analysis uses Axioma’s Portfolio Analytics system, which is based on the Axioma AX-WW 2.1 World-Wide Equity Factor Risk Model.
The appendix to STOXX’s research paper “Indexing Thematic Megatrend” is available to investors on request by submitting your contact details and corporate e-mail address by clicking here: firstname.lastname@example.org.
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