Thematics AM CIO, CEO outline investment objectives

Elisabeth Reyes
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Thematics AM CIO, CEO outline investment objectives

Thematics Asset Management was launched earlier in 2019 as an affiliate of Natixis Investment Managers, to target the growing opportunities linked to secular growth drivers linked to themes such as safety, water, and artificial intelligence and robotics.

Mohammed Amor and Karen Kharmandarian, Thematics Asset Management's CEO and CIO respectively, and two of the company's founders and owners, recently sat down with InvestmentEurope's Elisabeth Reyes to talk about the firm's development plans.

IE: What drove you to launch Thematics Asset Management?

MA: We have seen tremendous growth in the thematic market, with thematic investments growing at the very core of client portfolios, especially European clients.

Indeed, we noticed that 10 years ago, investors were integrating about 5%-10% of thematic investments in their portfolios. Mainly for diversification purposes and as a source of return, because traditional strategies were increasingly unable to satisfy investors' return expectations.

We have seen this as a great opportunity and given that we are ambitious and have proven expertise in this space, as well as a strong investment process in place, we naturally wanted to capitalise on that. We decided to pursue this entrepreneurial adventure and launch Thematics AM, joining the affiliate lineup of Natixis Investment Managers, one of the world's leading multi-affiliate asset managers - which owns 50.1% of Thematics AM. Our main objective is to capture the secular growth of the markets by combining freedom and robustness of process, in order to give a sense of purpose to our investments and generate long-term performance.

Because we came from a large organization before founding Thematics AM, we knew what advantages a large company could bring us. We didn't want to choose between the two worlds - a large corporate environment vs an entrepreneurial outfit - we wanted both.

IE: Why Natixis Investment Managers and not another company?

MA: Their model is unique. As an affiliate of Natixis IM, we do have the best of both worlds, namely the strength of a major financial player and the agility of a small investment firm. In particular, we benefit from all the infrastructure and support functions necessary to manage our funds effectively and we also rely on a powerful international distribution network across Europe, Asia, Latin America and the US.

Ultimately, we can focus on what we do best: generate performance for our clients, through active and high conviction strategies.

IE: Can you tell me more about the Thematics AM's products and its selection process? How much active Vs passive do you have, what is your methodology?

KK: We have an active investment approach and all our strategies are high conviction.

Our initial consideration in terms of making investments, is whether a business is a natural beneficiary of the ‘primary forces' which we believe to be the perennial root causes of global disruption - namely Demographics, Innovation, Globalization and Scarcity. For us, the thematic products that we have launched are long-term beneficiaries of the secular growth drivers that arise from these far-reaching transformative shifts.

Today, our range includes four funds launched last December: Thematics Water, Thematics Safety, Thematics AI & Robotics and Thematics Meta (which combines these three themes in one vehicle).

All our funds are global, we invest in all regions including the US, Europe and Asia. We don't do any long/short, we only take long positions. Our portfolios are unconstrained, not only in terms of geography, but also in terms of sector and size. We are benchmark agnostic, breaking away from market cap weighted indices - which give more weight to companies and industries that have won in the past - and focusing instead on the winners of tomorrow.

Identifying the small/mid cap companies that will grow in the future - rather than the big companies that are already successful like Apple, Amazon, Facebook, etc - is a strategic choice. We consider companies to be small sized when they have a stock market capitalization around $2bn and medium sized when it's $2-10bn. Such companies are not included in global stock market indexes like MSCI World or MSCI All Country World. There is little value for us in these indices: typically, our strategies have an active share of 95%-100%.

IE: What about your investment process?

KK: Our investment process includes three major steps. The first one is to define the investment universe. We identify investment themes which can be translated into an investment solution for our investors. The investment themes need to be attractive in terms of diversification, exposure to different sectors of the economy and different performance drivers. Once the work around volatility and risk around the theme has been done, we end up with an interesting investment theme with an attractive risk/return profile.

IE: For example, what areas or activities will be part of the universe of the Thematics Water fund?

KK: We will target the companies that help reduce the increasing demand for water, deliver technology, products or services that help reduce this increased demand. In the same way, utility companies like Veolia and Suez here in France, or even regulated companies in the UK or the US, will be included in the universe because their technology delivers drinking water to populations, or allow to treat used water.

Another example would be companies treating sea water to transform it in drinking water through a desalination process. Contrarily, we exclude companies involved in water rights, mainly Californian or Australian companies, because they own land with water resources and they wait for a water shortage, like a major drought, to develop when the price and demand for water goes sky high, and they then sell the commodity at very high prices. For ethical reasons, we choose not to invest in such companies. Similarly in Safety or in AI & Robotics, we exclude companies that are active in the military space, again for ethical reasons.

We have different ways of creating these investment universes and in identifying the right companies to invest in. We have access to both a strong network of theme experts - academics, unlisted company leaders, and others - and sell side research - ie, investment bank analysts - who can help us identify new emerging companies. We attend major conferences, and we have a significant proprietary research budget.

IE: What's your investment focus?

The core of our investment universes tends not to change much and the latter are quite focused: between 250 and 300 companies. Some will drop out because they are bought by bigger groups which don't meet our criteria; and there may be new entrants via IPOs, or if companies become more active in the theme we've chosen. In short, there are always some peripheral changes but the core doesn't change, which allows us to focus on a universe that we know well, companies we have been looking at for a while, we know their management, business model, strategy. We can spot good investment opportunities, price anomalies in the market and ultimately deliver performance.

Then we move to the second step of the investment process which consists in putting together the portfolio. It is all about financial analysis and spotting the best opportunities in this universe, which requires spending time with management, doing site visits, looking at the accounts to assess financial strength and set a company valuation and stock price target. In the search for the best companies in terms of best risk-adjusted returns, we will grade every element of each company: quality of management, business profile, ESG risk, and trading risk. We're investing in a company but we're buying stock market shares, therefore, we need to look at the volatility of the share price and stock liquidity. This is how we create a concentrated portfolio of 40 to 60 stocks.

As we tend to be long term holders of our investments, the third step is all about accompanying these companies in their ESG practices and mitigating risk further. All our funds already place an emphasis on integrating ESG considerations throughout the investment decision making process - from negative screening, to scoring companies in the investable universe and sizing positions, to active ESG risk monitoring, but also through engagement and voting. Our approach is not only exclusionary; ESG is integrated at the very heart of our investment philosophy.

We systematically vote at every ordinary or extraordinary board meetings of the companies we hold. We give our views on market prices, but also on the way the company is run - including ESG practices and we may talk to management and suggest recommendations to assure the continuity and success of the company. We also try to ensure financial stability by helping them reduce risk, which enhances long term performance. 

IE: Do you try to end up with 100% ESG stocks in your portfolios?

MA: It is not a primary objective for us to be entirely ESG; building 100% ESG portfolios can be difficult when it comes to safety, robotics and AI companies, which tend to be very technology orientated. Our approach is rather the following one: ESG is a key feature of our process since we established Thematics AM earlier this year. We are long-term by design in our investment style, we have high conviction portfolios and are in close alignment with our clients' interest and values. We are convinced that integrating ESG and maintaining an active ownership approach are critical to enhancing returns and better managing risk over the long term.

IE: You explained earlier that all your funds are global, does this afford you some protection from say the dollar exchange rate or other currencies?

KK: Our strategies are global and long term and so are most of our investors - retail, wholesale, private banks and some institutions. Generally, short term currency fluctuations tend to normalise over the longer term. And in a context of a globalised economy, most of the companies we invest in tend to have geographically diverse revenue streams, and hence currency-wise as well, providing some form of natural hedge. However, for those who wish, we offer hedged share classes in various currencies. The global nature of our investments and the way the investment universe is designed offers us the agility and flexibility to manage these strategies through various phases of the economic and market cycles and to position portfolios accordingly.

MA: It is also interesting to note that for most investors, investing in global equities using a thematic lens is motivated by the desire to better grasp what they are really gaining exposure to, and to also serve a purpose, beside financial returns. This probably explains why the allocation to thematic products tend to have long duration and to be sold in last resort in down markets.

IE: Can we do a quick assessment status of your four funds as they stand at the moment?

MA: Since we launched them back in December 2018, we've been delivering strong performance to our investors across the four of them and have already over $600m in assets under management - testimony to the successful distribution partnership with our shareholder Natixis IM.

Year to date perf of the funds:

   

01/01/2019 - 31/10/2019

Fund Name

ISIN

Morningstar Category

Return
(Cumulative)

Thematics AI and Robotics S/A USD

LU1923622705

EAA Fund Global Large-Cap Blend Equity

24.59

Thematics Meta S/A USD

LU1923622374

EAA Fund Global Large-Cap Blend Equity

27.57

Thematics Safety S/A USD

LU1923621723

EAA Fund Global Large-Cap Blend Equity

30.70

Thematics Water S/A USD

LU1923621301

EAA Fund Sector Equity Water

26.98

(Source: Thematics Asset Management)

The track record of our strategies is off to a strong start as they are very well ranked in their respective peer group. The feedback we get from our investors is that they specially appreciate the fact that we leverage on our expertise of the investment universe and then apply our robust and repeatable process, to build attractive and well thought-through investment strategies and select the gems out of them using a high conviction and responsible approach. These strategies have successfully ramped-up and gained traction, and with many high profile prospects performing their due-diligence at the moment, we are very excited at the idea of  welcoming new investors as clients of Thematics Asset Management. 

IE: What new themes are you considering adding to your portfolios?

KK: We will launch a new investment theme in early 2020. Similar to the existing ones, it will be based on the secular trends transforming our world - not something trendy that could die out in a couple of years. We have finalised all the prep work - which roughly takes one year to complete - ie, the design of the investment strategy, making sure it has the depth and breadth, exposure to diverse verticals and growth drivers, and of course has attractive risk/return characteristics. We are now only awaiting regulatory approval, which is pending, to propose this new strategy, not yet available in the market, to our clients. Pioneering an emerging theme set to become significant in the coming years is a good illustration of our entrepreneurial and innovative spirit, enabling investors to participate early in an attractive and long-term investment proposition.

MA: The real trap in today's world of thematic investing is that it has become very fashionable and it is therefore attracting all sorts of asset managers, for the good or the bad. It requires seasoned thematic investors to separate the wheat from the chaff, to avoid the pitfalls of strategies that are merely non-lasting fads that could turn investments into very risky bets, or of commercially unsuccessful global strategies that are turned into thematic strategies without the strong base of secular trends that helps filter out global equities in search for long-term sustainable compounders.

IE: How do you work internally? There are seven of you.

KK: We have six portfolios managers, including me who is also the CIO of the firm and our CEO, Mohammed Amor who is also in charge of the business development of our company. For each strategy we manage, there are two full-time dedicated managers. They both have manager and analyst roles, performing both the company/stock analyst role as well as portfolio management duties and associated responsibilities whereby strongest convictions are selected to create a concentrated yet diversified portfolio. They define where the best value lies by allocating different weight to different shares and subsequently keeping a close eye on those stocks, constantly deciding what to keep or not and whether there are other more interesting opportunities to consider. This management/analysis dual role really optimises opportunities and efficiencies.

Bios

 Karen Kharmandarian is one of the founders and owners of Thematics Asset Management. He is the chief investment officer of Thematics Asset Management, as well as being co-manager of the Thematics Artificial Intelligence & Robotics strategy. Kharmandarian has 25 years of industry experience, both on the sell side and on the buy side, of which 12 years of managing global thematic equity funds. He created and managed the first of its kind Robotics active fund in 2015. He holds a Bachelors degree in Economics and a Masters degree in Banking and Finance from the Sorbonne University, as well as a business degree from the Institut d'Études Politiques (Paris).

Mohammed Amor is one of the founders and owners of Thematics Asset Management. He is the chief executive officer of Thematics Asset Management. With 10 years of industry experience, began his career as a sales representative at Derivatives Capital, a brokerage firm specialized in structured products. He joined Turgot Asset Management in 2013, as head of Retail. In 2014, he joined Pictet Asset Management, where he covered retail, banks and networks in France. Amor holds a Masters degree from Ecole de Management de Grenoble.