How To Choose Investments That Are Aligned With Your Beliefs [Chills 55 Sponsored By Syfe]

We talk about the risks. Are we too concentrated on segments? What frameworks should we use to analyze different themes? This episode is sponsored by Syfe. You can check them out at syfe.com.

Hello, my name is Andrew, and welcome to another Chills with TFC episode. In this series, we talk to interesting people with relevant experience and insights to help us learn from their perspectives so that we can create the life we love and manage our finances well. Today, we’ll talk about thematic portfolios. Let’s welcome vice-president, head of business development at Syfe, Samantha Horton. 

What do you think about the saying that thematic investing is hype? You’ve heard of it? Do people say that to you? 

Samantha: Yes. I think there is a big distinction there in terms of what we mean by that comment or that question because I think thematic investing overall has been around for a long time, maybe in different forms but perhaps it was more traditional themes previously, in terms of investing in certain sectors, countries etc and getting a more tailored exposure that way. 

But now, we obviously have a list of themes which seem to be multiplying every day and so I would say maybe there could be some aspects of hype within the thematic investing when you look at particular themes within that. I guess one to call out would potentially be meme stocks, which obviously was all the rage earlier.

Andrew: That’s a theme. Meme stocks is a theme.

Samantha: Yes, that’s definitely a theme. I think they even have some ETFs (Exchange-Traded Funds) which have been created on the back of meme stocks. If you look at that, obviously then if you invest in those in the wrong time, then you can really get hurt but I don’t think I would say the same thing about overall thematic investing. 

Andrew: I’ve definitely seen more advertisements, more write-ups about it, but like you were saying, some form of themes exist for many years, right? It’s just recent years that you see more interesting themes that come up. But the more common ones, ESG, healthcare, what have you… let’s take ESG for example. People will be saying greenwashing? People tell you about greenwashing and the whole appealing to your motivations to do good for this planet.

Samantha: Sure. I would say obviously, that is a big concern for a lot of people investing in ESG and in my prior experience, we have done a lot of work around ESG scoring etc and I think there is an increasing focus on what are the most important aspects of E versus S versus G for particular companies that we should look at and what is really important to call out. I think one thing that I would say is a lot of companies get pushed into or put into the ESG bucket when they are basically outperforming on certain criteria within their benchmark, within their sector. 

For example, there are oil companies which can be put in ESG baskets because essentially, they are doing better than their peers but I think if you did want to take a perhaps more purist view, I would say invest in companies that have a value proposition that is actually doing what you believe in. So I guess one example of that is there’s a lot of companies which focus on perhaps in alternative meats or second hand clothing and those types of things where actually the overall business is about doing better or changing business models from more traditional ones where perhaps it wasn’t so positive for the environment etc.

Andrew: Give us an idea of how retail investors should approach thematic investing. There’s so many themes. I’m sure the way you approach each of them is different. Is there a framework to go into it? 

Samantha: Sure. I would say it really depends on why you’re investing or why you want to invest in a theme. I think traditionally, if I talk about frameworks, we talk about the core satellite approach where you should put 60-70% of your money in a more passive investment and then 30 to 40% in satellite investment, which can be one of these themes.

And then if I take it a step further, essentially, when you’re assessing a theme, is it you’re trying to diversify away from your particular exposures in the remainder of your portfolio? For example, perhaps you were heavily invested or heavily exposed to US stocks and you want to have more China or emerging market exposure and so therefore, you choose a theme which is in line with that. 

Or you are investing in a particular belief… you care a lot about the climate and you want to invest in sustainable companies and so therefore, you go for a more ESG portfolio. Or are you trying to create or capture alpha? Therefore, I guess more traditional frameworks come into play more, in terms of what is your risk tolerance. What is the risk and volatility of that portfolio? Is it a very high risk portfolio and therefore you should take that into consideration as you assess this basket or this theme?

Or is the valuation of these companies and this sector very high and is that something that you are aware that you’re getting exposure to. Particularly if I give an example, with inflation coming and some of these tech companies, if you’re investing in a… let’s say technology theme, these tend to be high growth stocks and they can be at risk at high valuations and they can be at risk with the onset of inflation and higher interest rates. So I think some of these things are things that you have to take into consideration.

Maybe one other thing I would call out is that if you’re trying to capture alpha, how sustainable is that theme that you’re investing in? Do you believe that it’s going to be around for a long time or is it “a fad”?

Andrew: Tell us more about this capturing alpha first before I move into the investing into what you believe in, investing in the future. Because I think these two are something new for me, because sometimes we go into the numbers too much as we go into investing. We want to make money, that’s why I want to look for alpha, but at the same time, there’s this appeal to your senses or emotions to invest in a future that you want which is why some people are going into investing in ESG kind of stocks but you still don’t want to lose money even if you’re doing it because you believe in the future. So how should I approach it? 

Samantha: I think one thing I would say is still to diversify but if you were looking at a specific theme, I think you should think about things like what am I buying and not just what these companies are doing, but where they are valued again in the market. Valuation would be one. Again, I would touch upon how sustainable… what do we believe is going to be the future of this sector or theme that you are investing in.

Andrew: Earlier on, you mentioned about ESG scoring and obviously you have some experience in this. Now tell us about ESG scoring and how do I evaluate ESG companies and stocks. 

Samantha: Sure. I think there’s a number of providers out there who do a lot of work around ESG scoring and I think there are then ETFs which essentially take that criteria and put them into various baskets. So I think the simplest way is to take that approach where you are relying on these third parties, the likes of MSCI (Morgan Stanley Capital International) etc which obviously have significant experience in this field.

I think it does become difficult to perhaps do the analysis yourself because a lot of this, a lot of the information is not easy to find on these companies to be honest so I think one approach is trusting the experts perhaps and taking the scores that they use and investing in the relevant companies that are scored highly or the ETFs which have those companies in them. They already added a layer of filter for you. 

Andrew: From my layman’s understanding, there’s a sort of checklist and these companies are ranked and given a score and you can look at all these reports to decide how to evaluate all these companies that you might be looking at investing. 

Samantha: Yes, these companies are typically scored on all the criteria: environment, social, governance and on criteria that is relevant to them. I mean if we take environment, for example, they would look at your process. If it’s a manufacturing company, they would look at what is your manufacturing process. What is your supply chain? How much does that pollute? Do you clean up after yourself? Do your plants basically… having good policies, where they are making sure that they are not impacting the environment around them and things like, even in a workplace, diversity would come into it. 

And really, if we go to the particularly… if we look at the governance side, you would think they look at things like how many women are on the board. Is there a diversity of thought perhaps in the company and things like that and those things are also important for ESG scoring. 

Andrew: Okay. So how does that correlate with looking at the financials of a company? Because you’ve mentioned ESG is nothing to do with numbers and whether the companies are making money. I guess I am stuck in this traditional mindset: look at the numbers, valuations. They’re looking at whether they have workplace diversity, whether they’re protecting the environment but does that translate into more alpha? I’m not sure if these two goals are going against each other.

Samantha: Sure. So perhaps maybe two ways to answer that. I think firstly whether it impacts the financials I think is perhaps maybe more questionable. I think some of these things, particularly on the governance side, there is some evidence that companies do perform better when they do have a better governance policies. They have better, more diversity etc so that can play into it. And if generally the company is run well, they do care a lot about these environmental and social issues as well. 

But I think that would be perhaps a looser correlation than if we look at alpha. Because alpha is what does the stock do in terms of the performance in the market. How much money does it make you versus benchmarks? I think that’s perhaps a little bit interesting to look at because there is evidence that basically companies which improve their ESG scores get more inflows.

And therefore, that creates a… that does help to create alpha because if more money is essentially shifting into these companies, perhaps they are valued higher. They are given a higher valuation versus their peers, which have lower ESG scores and therefore attract more capital etc. Then, we can see some outperformance in alpha. 

Andrew: There are obviously too many things out there. Lets go into some of the hottest ones. Let’s go into healthcare because it is a topic that we’re really concerned about recently. What do you think about healthcare as a theme? 

Samantha: Sure. It’s definitely one that has gotten much more attention of late… 

Andrew: Past 2 years.

Samantha: Yes… as we can imagine. I think it’s one of those things where pre-Covid, I don’t think anybody would have known the name of many of these pharmaceutical companies, let alone the name of what vaccine you’re getting. I don’t think you ask when you get your flu jabs etc, who made it. It’s never been a big concern to people and obviously now, there’s a lot more focus on this sector and this theme and also the companies within it. 

I think that is something which is obviously… it’s a big question. It’s a question mark in terms of how sustainable this is and I think… my own view is that obviously, we have an aging population which is only going to require more healthcare investment and requirements. And therefore, a lot more money is going to have to go into this sector. 

One other thing is that these these tend to be more value stocks. They tend to be perhaps a diversification from your typical technology companies etc because if we’re worried about inflation, and we do see that start to play a role in the performance of markets even more then we could see some of these value stocks and sectors such as healthcare start to outperform.

Andrew: So the role of healthcare stocks would be more of a defensive role and to take care of inflation as well… 

Samantha: Exactly. 

Andrew: …as compared to investing in growth stocks, is that way you’re saying?

Samantha: Exactly. So this could be a way to protect yourself against a lot of volatility, which we could expect in the market over the next 12 months or so.

Andrew: Do themes generally outperform the market?

Samantha: I think that really depends on which theme and it depends on your time horizon. I think obviously, if you pick the right theme at the right time, you can have significant outperformance. And I guess one example of that, a very popular one would be ARK and ARK innovation, which is obviously a play on disruptive technology and high growth stocks. If you invested in it last year, I think you would have basically returned over almost 150%. However, this year, if you had invested in that same theme and that same ETF, you would ‘ve been down almost 25% in a market that was up 25%. 

That’s one example where I think themes, it really depends in terms of the right timing etc and that’s also why we believe that you should diversify because generally, all the studies have said that passive investing does, over a longer term time horizon, give you better returns and if you diversify, you essentially don’t have to run as many of these risks in terms of highly volatile portfolios and potential(ly) down the years etc.

Andrew: We were talking about hype earlier on. Do you think that ARK ETF contributed to some of the hype or interest in this area of investing?

Samantha: I think a bit of both. I think that we’ve obviously seen a big increase in retail investing and I think we’ve seen a lot of these themes and these ETFs have gotten a lot more accessible. An example, even for Syfe. I mean platforms like Syfe has made it much more accessible and affordable for retail investors to capture some of these themes and I think because of that, we’ve seen obviously large inflows into much more concentrated pockets of the market, such as technology and ARK being obviously an example so I’m not sure if you can call it a contributor, but obviously, until this year, I’ve been a big beneficiary, let’s put it that way. 

Andrew: Should people be concerned that some of this hype could be driving up the entry prices of such stocks?

Samantha: Yes, I think that’s a very relevant topic right now and I think again, using the example of ARK, you basically can if you enter some of these very high-risk themes, then you can get hurt and that’s why we typically recommend that you only put a portion of your investments and your portfolio into perhaps some of themes which could be “more hyped” than others and therefore, more risk in terms of your entry point and when you enter the market.

Andrew: So what other risks should we take note of when investing in themes? 

Samantha: Obviously, as you mentioned, timing is one of them. Some of these themes have had strong influence and strong performance over a shorter period of time and therefore, there are some risks that you do to catch things at the top. For that and many other reasons, again, I would say that the biggest risk is really concentration risk so you should weigh up how much you’re willing to lose versus how risky the portfolio is and therefore, allocate accordingly to that theme. 

Andrew: Oh, you mentioned core and satellite, right? So generally as a rule of thumb, how would you advise someone, in terms of how they allocate, for example, to the index to thematic investing to bonds and other asset classes? Of course, it depends on your personal goals but how do you approach this personally?

Samantha: Sure. Generally, the rule of thumb is 60 – 70% in a core diversified portfolio and 30 – 40% in a satellite/thematic portfolio and let’s call it… whether that is in terms of a basket of stocks or portfolios or single stock allocation. I think I would put it both in that category. 

Obviously, that skew would depend on perhaps, your level of expertise and how much you want to back yourself and how strong your belief is in some of these themes and time horizon and things like that. But generally, we recommend 60 – 70% to remain in a core diversified portfolio. 

Andrew: Okay. In our conversation, we’re bringing up disruptive tech, high growth companies. Well, it is a theme, so what is the Syfe thematic portfolio for such companies called? 

Samantha: Sure. So we have a portfolio and under our Syfe Select offering, which is exactly as you called disruptive technology, which essentially captures all these companies like cloud computing, gaming some companies which are involved in blockchain technology etc… at the very disruptive end of the technology spectrum which also, as you mentioned, tend to be higher growth stocks and higher-valued stocks as well. 

Andrew: Let’s talk about China. Could you walk us through on this theme on investing in China companies?

Samantha: Obviously, a very polarizing topic right now in terms of I think the camp that believes that China is going to recover. It is maybe now is definitely the bottom and if you take a longer-term perspective, there will be significant returns there, versus perhaps the other school of thought saying that or believing that essentially with China, it is too risky now. Perhaps the clampdowns that we’ve had with the regulatory clampdown that we’ve had… I guess too many sectors now to name really, is going to have a lasting impact on investing, in any Chinese-related companies and essentially, the tone coming out of China, profitability, wealth etc is not really being celebrated or encouraged anymore means that also there is a risk for any company really, who does well and has any form of outsized returns that they could see potential extra regulation.

So I think that is one… for me, that really depends a little bit on your own personal view and obviously and hopefully an educated one. But I think even if you ask perhaps the people who have studied it the most right now and are very in tune with what’s happening in China, I think it would be hugely polarizing in terms of where are some of these companies and where is China going to be trading in 12 months from now or 24 months from now.

I think it’s a very difficult one to call. I think if you perhaps ask my own personal view, I think it really depends on your time horizon. I think if you’re talking about… is it going to significantly outperform and recover in the next 12 months, that’s a very high risk trade I’d probably say. But if if you’re talking about, 3 – 5 years or 10 years from now, these could potentially be very good entry points for China.

Andrew: But the option is there if you want to invest in it. 

Samantha: Yes, the option is definitely there. Syfe Select also has a China thematic portfolio ready for anybody who wants to take that view. But yes, and I think it’s one of those things again where you allocate accordingly to your risk tolerance. If you wanted to place a small bet on the recovery, obviously, as with a lot of things, the further something has gone down and it has been underperforming, there’s obviously a potential that it can recover at some point and you could get outsized returns for sure if if we do see at least even some stability in China.

Andrew: So each theme has its own characteristics and it helps to have some knowledge going in. There’s no one-size-fits-all solution moving into thematic investing itself and you’re saying that you have to diversify and it might appeal to your interest or you might have some knowledge in it. Any last piece of advice for listeners who wants to move into thematic investing? 

Samantha: I think the typical one that I would say is is definitely investing in what you know. I think I’ve even learned that the hard way, but I think being educated and investing in something that you really have conviction and some strong beliefs in is important and I think that can work with whether it’s single stocks or also on the thematic side. 

Andrew: Did you say you learnt it the hard way? Is there a story there?

Samantha: No, I think obviously I’ve spent most of my career looking at consumer stocks and I think when I’ve left the institutional investing world, I have realized that in my own portfolio, the stocks which have outperformed were definitely the stocks which I’ve known and followed for a long time and have a good understanding of over the stocks that I thought I’m just gonna take a little punt there. May or may not have been some Chinese names… I’ve definitely underperformed significantly.

Andrew: All right. Thank you, Sam. Thank you for sharing. 

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The last part is we ask more personal questions, general views. Last three questions for you. So what is one of your core life principles? 

Samantha: I probably have to go with no pain, no gain. I think you can… I guess you can use this in both the financial and non-financial sense. But would you like me to talk about the financial or non-financial? How about I ask you?

Andrew: Both.

Samantha: Both? Okay. So, from a financial context, that does imply investing early, saving for a better future and to achieve financial freedom and also in terms of, I think, it is something where I believe even if you were feeling the pain in terms of perhaps potential losses in your portfolio to take a longer-term view sometimes. I think that’s an important lesson for people to have.

And I think in the non-financial sense, then I would say that I believe in hard work and that you reap the rewards of that going forward, whether that be in work or working out or anything like that. 

Andrew: What is one piece of financial advice that you think should be shared more often?

Samantha: So one thing that I think has really resonated me with me I think since I’ve joined Syfe and that’s basically the message of time in the market is more important than timing the markets and that I think is a very important thing that I think as much as it sounds cliche and I think we all maybe have heard it before multiple times, but I don’t think that many people actually follow through with it. 

I think if we did that, we would all see better outcomes financially when managing our wealth because if you miss a significant peak or rally because you were waiting to time it, that can be very, I guess, hurtful for your returns, or negative for your returns. That’s one big thing that I would say. 

Andrew: What is one area of life that you’re giving additional focus right now? 

Samantha: As much as I can, I’m trying to spend as much time I can probably with my daughter, who recently turned one years old. Not easy, particularly in an industry like this and working in a startup. So yes, trying to spend as much time and quality time that I can. 

Andrew: Thank you for your time. Let’s get you back to your little girl. 

Samantha: Thank you. 

Andrew: Thank you.