Weigh the opportunities and risks of thematic investing, which targets demographics like the big spending of the 92-million-strong millennials.
The mighty millennial generation, who at 92 million strong are sometimes considered a go-to source for purchasing power and techno-savvy, are now a hot topic for so-called theme investing.
Following what’s called the “millennial model,” these thematic portfolios are stocked with potential investment opportunities that reflect the growing needs, wants, and desires of this demographic army. But should you invest in the shopping patterns of a bunch of 30-and-unders?
If you’re drawn to theme investing (see the sidebar below) and believe that these young adults are responsibly and profoundly shifting the attitudes of the world, you just might. After all, according to Argus Research, the millennial generation has some $300 billion in direct purchasing power and another $500 billion in indirect purchasing power (thanks mostly to their baby boomer parents).
“This generation experienced their formative years around the turn of the millennium and have been surrounded by rapid globalization and technological innovation,” according to “The Millennial Perspective” report from ImpactAssets, a nonprofit financial services firm that manages donor-advised funds and other assets for social and environmental impact. “Millennials are the first generation to be truly global, sharing experiences across cultures and geography, connected by technology more than any generation before them.”
As a result, they’re known for their love of innovation—and all things technological—while embracing what were once considered elements of the counter-culture ethos of the 1960s and 1970s: back to the land, sustainable, and green, according to Argus Research. In other words, many are social-responsibility nuts.
That means they’re putting their money where their mouths and values are, buying goods, products, and services that are healthy and wholesome, cutting-edge, and social, all from companies that bill themselves as conscientious.
Broadly speaking, according to recent McKinsey report “The Rise of Thematic Investing,” the thematic portfolio approach captures “opportunities created by long-term structural trends and the medium-term cyclicality often associated with these trends.” It’s a top-down investment method with a focus on broader, macroeconomic matters that also includes diversification, balance-sheet strength, and growth at a reasonable price.
Smartphones, for example, represent a long-term structural trend across the world. But a smartphone that allows you to make and receive phone calls, text messages, access the Internet, and take beautiful pictures could be considered a medium-term cyclicality because the next generation of smartphones might be able to do all that plus start your car, create a grocery list, and take over conversations with your mom when you are tired.
A thematic investment would include a juggernaut company known for its innovative prowess and/or a fledgling electronics startup with more colorful bells and whistles. Other thematic portfolios could be tied to electric cars and related stocks or to China’s growth fundamentals, for instance.
—Source: McKinsey & Co.
It might sound easy, but it’s not.
“Thematic investing requires a fundamental understanding of the impact of long-term economic, political, and social trends on regions and sectors, which reveals investable opportunities,” say McKinsey researchers.
Savvy thematic investors figure out how the ripple effects of structural trends can create hot spots or dead zones in certain sectors and regions. But the millennial generation is hardly small change. “There’s an enormous amount of interest in this particular demographic,” says Jim Kelleher, director of research at Argus, an independent stock research and analysis firm. Earlier this year, Argus introduced a millennial model portfolio that attempts to capture the investable interests of the millennial generation.
“They represent a lot of money already and a lot of spending—they buy nice clothes, take nice vacations, go out to eat more,” he adds. “They’re transforming the consumer experience.”
And they have two upcoming events in their lives that will amp their purchasing power even further: the transference of wealth from their parents’ estates and the eventual paydown of the enormous student debt many of them hold, which Kelleher calls an “unprecedented headwind” that’s actually bearing down on some spending now.
Perhaps surprisingly, millennial portfolios aren’t necessarily geared toward millennials, who might instead explore index investing or enlist the help of professionals, says Patrick O’Shaughnessy, a portfolio manager at O’Shaughnessy Asset Management and author of the book Millennial Money: How Young Investors Can Build a Fortune.
“Just buying a basket of stocks because it sounds good and you know their products is a terrible way to invest,” he says. That’s because it takes a lot of work to research and keep watch on the stocks, and you have to refresh the names periodically.
Thematic portfolios may be best left to Wall Street’s most seasoned. In this case, “experience” is the investing theme that may grab your attention.
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