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Thematic investing: History can help assess the future


In this article:

    Understanding the drivers of past industrial revolutions can be invaluable when evaluating  long-term sustainable investment opportunities. Edward Lees and Ulrik Fugmann of the Environmental Strategies Group outline the lessons they draw from economic history.

    Even in the midst of a storm of headwinds – Covid, spiralling inflation, food supply stress, extreme climate events and geopolitical upheaval – the world is on the cusp of a new industrial revolution.

    ‘Industry 4.0’ – involving such advances as the smart factory, autonomous systems, the Internet of Things, artificial intelligence, 3D printing and machine learning – promises a greener future. A replenished biosphere, better energy and food security and an upsurge in productivity growth that can boost living standards and job opportunities around the globe are key components.

    It also looks set to usher in a sharing economy that could enable capacity to be used more efficiently, as well as repair fragmented societies.

    The interconnected nature of these developments means that shared ‘open source’ approaches to information and innovation can accelerate the advance of change – empowering everyone. As a practical example, people will more rarely own cars; they will likely simply hire a vehicle (probably an autonomous electric vehicle) when they need to.

    The road to industry 4.0

    Such developments need massive funding from investors. However, assessing which will be the long-term winners and avoiding the short-term ‘fads’ is tricky. One way to help foresee how industry 4.0 will mostly likely evolve over the next few decades is to draw upon the lessons of previous revolutions.

    The original industrial revolution, in England between 1760 and 1860, was driven by technological progress, education and a growing capital stock. It turned the country into ‘the workshop of the world’ and brought about a sustained rise in real income per person.

    The second industrial revolution, in the US from the 1850s was driven, by factors such as electrification, crude oil production, the rapid spread of telephony and assembly-line vehicle production. These helped ignite the country’s ascent to global superpower status.

    By the early 2000s, the productivity potential of the infrastructure upon which the second industrial revolution was built had become exhausted. A new technological infrastructure emerged, driven by computers, IT networks and robotics. These were the seed stock of the latest leap forward, Industry 4.0.

    A new, greener infrastructure

    Our new paper reflects on the views of economist and author Jeremy Rifkin. He argues that the new revolution could be transformative, not only for economies, but for the environment and the way societies are organised.

    Rifkin believes that technological advances will reduce the cost of producing and delivering a growing array of goods and services to near zero (or a marginal amount). He points out this is already the case in publishing and the media. He argues that each industrial revolution created a new architecture that drove nearly all the gains achieved in productivity.  

    Over the next decade, this infrastructure is set to expand to include autonomous electric and fuel-cell vehicles operated by near-zero marginal-cost renewable energy on smart road, rail, water, and air ‘internets’.

    This should allow people to share communication, energy and mobility, partially in the capitalist market and in the emerging sharing economy.

    Identifying themes and winners

    The great challenge facing investors is that it is extremely difficult to identify those companies that will be able to survive and prosper for the next 10 to 20 years.

    In our view, history has shown that the growth of disruptive products and services has been significantly and consistently underestimated. The rate of technological change and cost declines have often surpassed projections. Just look at the projected share of shale oil in US oil production or the share of electricity from renewable sources in total US power generation.

    Environmental solutions such as green hydrogen, solar energy, electric cars or bio-plastics are changing and disrupting manufacturing and supply chains and transforming global consumer behaviour.

    Understanding this accelerating consumption transformation – and, importantly, its impact on the industries affected by it – helps to inform our investment decisions. We seek to benefit from the penetration in the marketplace of transformative technologies, the growth rates that this advance brings for industries and companies, and what this means for their lifecycles.

    Finding winners takes research, an open mind, and the ability to examine challenges and opportunities from multiple perspectives. It also means having the conviction to invest purely with an unconstrained approach that targets positive environmental outcomes.

    We believe that simply looking at individual trends, however transformative they may be, is no guarantee of investment success.

    What is required is a wider understanding of the breadth – and, crucially, the inter-relatedness – of the challenges and opportunities the world faces.

    We believe that involves taking a rigorous, holistic approach to see how the evolving infrastructure platform creates business opportunities and to identify the companies best placed to exploit them.

    Once we have a thorough understanding of previous periods of disruption, it can help us identify the potential investment winners of the coming new carbon-free age. And we are convinced that active investment management is the key to identifying companies that can outperform.

    Download the PDF

    Also listen to ‘Talking heads – Energy crisis response should include faster transition’, a podcast with Edward Lees

    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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