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12 April 2021 | GSAM Connect

With Disruption Comes Opportunity

The Case for Thematic Investing

Traditional equity benchmarks, by nature of being market capitalisation-weighted, are backward-looking. They inflate exposure to companies that have performed well historically, irrespective of their alignment with future growth, and often underrepresent those companies poised to benefit from such themes.

Take, for example, the rapid industrialisation seen across many emerging markets in the 2000s. This underpinned a commodity super cycle, buoying the stock prices and hence benchmark weights of many commodity-related companies and countries. For context, at their peak in mid-2008, commodities represented almost 25% of global equity markets; today they represent just 8% having seen their value fall by roughly one-third in that time. In contrast, over the same period, technology and internet-related stocks have returned almost 300% and represent almost 23% of global benchmarks, having been just 10% in 20081.

The purpose of this example is not to state the obvious by suggesting investors would have benefited from owning tech stocks in lieu of commodity-related companies. Rather, it is to highlight the fact that long-term growth themes – in this case the rapid advancement in technological capabilities and the rise of the digital economy – can drive superior outcomes
for investors.

The basis for this statement is worth reinforcing. The reason such secular growth themes drive superior outcomes for equity investors is because, over the long run, equity returns are driven by earnings. Multiples and currencies may influence outcomes over shorter periods, but being on the right side of growth and disruption is a critical driver of success over time.

As is shown in the chart below, this is why companies aligned with key secular growth themes have performed so strongly, whereas those that have had their business models disrupted have lagged severely

 

Disruptors versus disrupted: Decomposition of S&P 500 Performance


1. Source: GSAM, FactSet. As of June 2020. Universes based on proprietary views of the GSAM Fundamental Equity team. 

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