MARKET INSIGHT
Thematic trends: New ways to diversify and search for long term value
Valery Senko, Trendvision AI founder, explains how its machine learning-driven research tool enables investors and analysts to harvest global thematic trends in equities and provides solutions for new long term equity allocation decisions
Why do you think that thematic trends are more important or in any way better than a simple value approach, that has been successfully implemented by Warren Buffett and multiple other investors over the years? Of course, I agree that a value approach is something that has proved itself for many successful investors. But in a new era of algorithms and machines this approach became too popular. In many other smart-beta cases, the most profitable opportunities have been taken away by hundreds of investors with the same logic. The Wall Street Journal quoted Charlie Munger’s idea that you need to be fishing where nobody is fishing. Our initial results show that thematic
trends might be a new area of search for above-the-market returns. Particularly in the coming era of low equity returns, which all the analysts and asset managers envision in the next decade. For me, the trend is a more stable and stronger driver than even value criteria on a company level. Even more so if you think about the portfolio with the key driver or factor. It does not mean that we should ignore value screen altogether.
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WE HAVE DEVELOPED SOMETHING UNIQUE AND VERY VALUABLE FOR THEMATIC TRENDS INVESTORS
But as we read in the business media these thematic trends seem to be very well covered by exchange-traded funds (ETFs)? We continuously monitor the universe of thematic ETFs which are available. There was indeed a huge growth of ETFs in this area in terms of a number. Yet the amount of money under management still remains immaterial compared to other ETFs, with very few exceptions. Our view is that it is developing this way because most ETF providers use it more for pure marketing purposes, rather than a real investment instrument. And the key problem here is that such thematic ETFs are deploying similar approaches and end up either with an excessive number of companies in its holdings or a very limited number. Another important fact is that there are
still very few ETFs in this niche built from and for institutional investors. Our trend rebalancing methodology might be very useful to resolve this problem.
Why do you think your portfolios are better than such ETFs? Because we use several approaches simultaneously to a very wide universe of stocks. And results of some comparisons and back-tests are very promising. Obviously this is not a guarantee of future returns, but we understand and are ready to discuss with our clients how to implement certain approaches to capture additional returns from thematic factors. We are currently testing our TRV index, which will provide them with even more actionability. Provided that we have a historical
data on composition of ETF, we have functionality to compare any given ETF
ISSUE 75 | 2019
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