Some may dismiss this approach as a marketing gimmick. Because trends take time to play out, specific returns data on this type of strategy is, to date, scarce. Yet, proponents say the traditional strategy used by fund managers—seeking investment opportunities in specific sectors, countries or regions—is a mistake. "The central principal of our investment philosophy is the belief that no company, market or economy can be considered in isolation; each must be understood in a global context," says Ciaran Spillane, New York–based head of Newton Investment Management’s U.S. business, which constructs all of its funds on a global thematic basis.

Several large investment groups are finding value by taking a single-system investment approach to the following themes:

Food. At DWS Scudder, a U.S. division of Deutsche Asset Management in New York, an investment committee came up with a number of global themes that can be allocated to broader trends (see "Market Themes," page 59).

According to DWS Scudder portfolio manager Oliver Kratz, his firm’s latest theme is global agribusiness. By analyzing worldwide trends in populations, household income, food consumption and agricultural production, the committee noticed significant gains in household incomes in China and India. As these households become relatively wealthier, DWS Scudder expects them to spend more of their income on animal-based foods that they could not afford in the past. The firm is interested in a range of companies linked to the agribusiness theme, from biotech firms involved in the genetic modification of crops to improve quality and yield, to land and plantation businesses.

Debt. Spillane says the theme playing into his firm’s portfolios is the rapid increase in debt levels in some of the most advanced economies. "There has been a reversal in traditional debt and credit roles on a global basis. The former creditor countries like the U.S. have become debtor countries, and vice versa," he says. "Digging down deeper, we’ve seen a very low interest rate environment in the U.S., UK, the Eurozone and Australia. This has manifested itself in significant appreciation in residential real estate and an explosion in consumer credit in these markets the last five years, which has led to a front-loading of consumption." He believes that companies reliant on these consumers for earnings will be unlikely to significantly increase those earnings going forward. "The flipside of that is that there are other parts of the world that have very high savings rates, have underleveraged consumer populations and have residential real estate that hasn’t really gone anywhere. They are likely to be the consumer drivers of the next five to 10 years." He is therefore looking to take long positions in companies reliant on consumer spending in places like Hong Kong and Malaysia, rather than the U.S. or Europe.

Mass Affluence. Nick Rundle, a portfolio manager with boutique thematic investment house Taylor Young in London, sees opportunity in the increasing numbers of wealthy and mass-affluent people in the world, and how they spend their money. "Globally, we’ve been looking at buying interest in companies like Tiffany and Porsche—those related to high-end goods where the final demand is pretty insensitive to economic cycles," he says. "Given the increasing numbers of high-net-worth people in the world who aren’t particularly sensitive to mortgage rates and things like that, these kinds of companies will tend to do well in up cycles and down cycles."

So Prove It . . .
With a long-term thematic approach, investors may bristle at paying for day-to-day management fees. If a theme takes years or even decades to play out, does that mean portfolios should change very little in that time? And if thematic investing is so easy, then why not just look at the themes in which some of the big institutions are investing and independently create a buy-and-hold portfolio? The professional thematic manager’s response is that although the guiding themes are long term in nature, they also add value in the short term. "Within our risk management framework, we seek to exploit mispricings in asset values," Kratz says. "For example, our disequilibria and distressed themes are constantly replenished with ideas. In the distressed theme, companies will lose their distressed status over time. Those stocks are then sold and replaced with other companies that display distressed attributes."

Rundle adds, "I think you always have to have someone with a hand on the tiller."

Market Themes
DWS Scudder separates investment themes into three categories: one that should benefit from strong market environments; one for weak market environments; and one for any type. Below are themes and corresponding portfolio weightings of the DWS Scudder Global Thematic Fund as of the end of 2006:

THEMES IN STRONG MARKETS
Talent and Ingenuity: Companies that thrive on human talent without requiring investments in hard assets. Portfolio allocation: 19 percent.

Supply-Chain Dominance: Companies that are gaining the greatest leverage over their suppliers, customers and competitors through better economics and cost savings. Allocation: 11 percent.

Asymmetric Negotiators: Companies that are able to conduct one-sided price negotiations as a result of their access to raw materials, often companies in oil and natural gas. Allocation: 10 percent.

Large Units: Companies benefiting from a number of changes, such as the emergence of a sizeable middle class, the growth of consumerism and increasing capital investment, taking place in China and throughout the larger Asian continent. Allocation: 8 percent.

Security: Companies that safeguard people and their assets and information. Allocation: 5 percent.

THEMES IN WEAK MARKETS
New Annuities: Companies that can benefit from the predictable, long-term returns generated by their diversity of business lines and measurements. Allocation: 11 percent.

Market Hedge: Companies that deal in real assets such as gold that have traditionally served as a store of value against depreciating global currencies and provided insurance against unfavorable events such as natural disasters. Allocation: 2 percent.

Private/Public Partnerships: Companies that partner with governments and regulators to provide important public services, which may allow these companies to deliver longer-term investment returns amid difficult economic or market environments. Allocation: 2 percent.

THEMES IN ALL MARKETS
Disequilibria: Companies that can benefit from changes to their business models made in response to the dynamics of their respective industries. Allocation: 19 percent.

Exatrophy: Companies emerging from a period of stagnation. Allocation: 7 percent.

Global Agribusiness: Companies that address the needs of the growing global population, including companies specializing in land, fertilizer and aquaculture. Allocation: 4 percent.

Distressed Companies: Companies whose stocks are valued excessively low, often because of structural flaws in the international financial markets or short-term misperceptions of risk by those markets. Allocation: 2 percent.

John Ferry is an Edinburgh, Scotland–based financial writer and a senior correspondent for Worth.