Wise investors know when to follow their

themes
To make decent money on a long-term investment, buy shares in companies tapping in to the
world's growing demand for food, fuel and water, our panel of financial experts tells Jennifer
Hill

Saturday, 11 September 2010

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AP

Flood survivors jump to catch relief supplies at Muzaffargarh, in the Punjab. This summer's
floods in Pakistan have devastated crops, so the prices of exchange-traded commodities such as
wheat and corn are likely to soar

 enlarge

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stock markets have endured a rocky ride and remain volatile, putting to rest to the theory that
emerging markets decouple from developed ones. Against this backdrop, investment experts are
increasingly favouring stocks that tap into global themes: the growing scarcity of water, the
energy crisis, the challenge of feeding a world of nine billion people, the rise of Asian
consumerism and how technology might change the world.

The performance of such shares does not depend on a particularly geographical stock market or
economy faring well, and should drive markets – and make money for investors – over the
medium- to long-term.

"At the moment, most sectors appear to be extremely correlated; everything is moving in the
same direction," says Ben Yearsley, an investment manager at the financial adviser Hargreaves
Lansdown. "However, that's only a short-term phenomenon and there are certain sectors that will
prosper. It is clear as you look around the globe where there are opportunities to make money."

As the planet's population grows, more and more natural resources will be needed for fuel, heat,
food and general sustenance. Therefore, investment in water, energy and agriculture should
prove profitable as demand rises faster than production. Here, we look at how investors can tap
in to these opportunities.

Water

Demand for water is rising as the global population grows, agricultural needs increase and
developing nations become wealthier. At the same time, supplies of fresh water are falling as
weather patterns change and water sources are over-used.

Seb Beloe, who heads research into socially responsible investing for Henderson Global
Investors, says: "Scarcity has driven an increase in demand for more efficiency and the long-term
prognosis for companies focused on improving the efficient use of water is very good."

The $29bn water recycling technologies market is poised to almost double in size to $57bn by
2015, a report last month by SBI Energy predicted. However, while some stocks in the sector
have soared, others have floundered. Shares in the established water companies Northumbrian
Water Group, Severn Trent and United Utilities have risen by 25.7 per cent, 22.7 per cent and
17.9 per cent respectively in the year to date, largely off the back of a favourable regulatory
review. Niche players Energy Recovery, of the US, and Japan's Torishima Pump have fared less
well, slipping by 49.7 per cent and 33.2 per cent.

Phil Wong, of the stockbroker Redmayne-Bentley, likes the iShares S&P Global Water
exchange-traded fund (ETF), which "gives low-risk access" and tracks the 50 largest and most
liquid (in financial terms) companies involved in water-related businesses across the globe.
These include familiar names such as the aforementioned United Utilities and Severn Trent, as
well as France's Veolia Environment and Suez Environment. The ETF is up 10.1 per cent in the
past year.
For a riskier play, Mr Wong tips Amiad Filtration, a company listed on the Alternative
Investment Market. It is involved in taking the salt out of seawater to make it palatable. Its shares
have risen by 21.8 per cent in a year.

Energy alternatives

Energy use is immense and growing. In 2008, world's consumption stood at 11.3 trillion tonnes
of oil equivalent – 196 per cent higher than in 1965.

Tom Stevenson, an investment director at Fidelity International, says: "With developing nations,
such as India and China, growing rapidly, so too will global energy consumption. China and
India combined represent more than a third of the world's population. The impact of growing
demand from nations of this size will be very large indeed."

Companies involved in wind power, solar energy, biofuels and carbon capture have the potential
for strong growth, he says, with the likes of the Danish wind turbine manufacturer Vestas Wind
Systems and Germany's SMA Solar Technology having established themselves as global leaders
in their fields. However, despite a strong medium-term outlook, Mr Beloe points to a tough time
for the renewables industry of late, because of financing issues arising from the credit crunch and
lower demand from some markets, notably the US.

The WilderHill New Energy Global Innovation Index, which tracks the performance of 54 clean
energy stocks, has fallen by 16.6 per cent since January, under-performing the S&P 500 index by
more than 15.8 per cent.

Mr Beloe prefers to tap into the theme through companies involved in energy efficiency, such as
Ameresco, based in Framlington, Massachusetts. One of the few recent success stories, it made
an initial public offering at the end of July and its stock has risen 29.3 per cent since. Among the
funds, Mr Yearsley, at Hargreaves, recommends the Pictet Clean Energy fund, which rose 6.1
per cent over the past year.

Agriculture

The global population is set to jump from six to nine billion by 2050, which means there will be
a lot more mouths to feed. Even in the short-term, the planet faces "real threats" to its food
supplies, warns Darius McDermott, managing director of the discount broker Chelsea Financial
Services.

"The recent Russian heatwave and floods in Pakistan will threaten supplies for a basic human
diet over the next year," he says. He recommends tracking soft commodities, such as wheat and
corn, by investing in exchange-traded commodities, such as those offered by ETF Securities.

Another way to tap into soaring food prices is through agricultural equities. Mr McDermott likes
the Eclectica Agriculture fund, which invests in companies that make or process soft
commodities or manufacture farming machinery. "You are getting exposure right across the food
supply chain, from pesticides to the sale of new tractors and harvesters," he says. The fund is up
13.1 per cent in the past year.

Mr Yearsley, at Hargreaves, likes Sarasin Agrisar. Its largest holding is Jain Irrigation Systems,
an India agriculture business. The fund is up 20.7 per cent over 12 months, according to data
from Trustnet.

The rise of eastern consumerism

China is almost certain to be the largest economy in the world by 2050, with latest figures from
Goldman Sachs suggesting it might overtake the US as soon as 2027, owing to the fallout from
the western-inspired financial crisis. Mr Stevenson, at Fidelity, says: "The rise of emerging
powers, the impact of globalisation and a historic transfer of wealth, predominantly from western
developed nations to eastern developing nations, will transform the familiar economic, political
and investment landscape."

This will give rise to a powerful Asian market for consumer goods, which is great news for
luxury brands and the technology sector. Laurent Belloni, co-manager of the Pictet Premium
Brands fund, which has made 35.2 per cent over the past year, says: "The strong growth in
China's economy is boosting a new class of luxury buyers with a population that tend to be
young and seeking status."

The Chinese account for 19 per cent of Louis Vuitton's sales, second only to Japan. Sales of such
"mega-brands" are expected to grow by up to 35 per cent in China this year, and growth should
remain in double digits for a long time, according to Mr Belloni.

Brian Dennehy, managing director at the adviser Dennehy Weller and Co, warns against piling
into themes that could prove fads, but recommends buying into companies that are taking
advantage of the economic shift from West to East.

He likes the M&G Global Basics fund, which invests in everything from the Anglo-Australian
miner BHP Billiton to PZ Cussons, the maker of Imperial Leather soap. The fund is up 22.9 per
cent in the past year.

Technology

Tech stocks were the blue-sky darling of a decade ago – promising a lot but delivering little but
hype and losses for investors who got burnt when the bubble burst. Ten years on, the technology
sector has delivered.

"[It boasts] huge profits, large free cashflow and is probably the only global sector with no net
debt," says Mr Yearsley. "If you assume we are in a low-growth environment, companies will be
looking at ways of cutting costs; tech is one tool they will use to do that."

He tips the GLG Technology fund, which has made 23.1 per cent in the past year and is up 31.1
per cent over a decade, according to Trustnet. Its top three holdings are the computer giant
Apple; Cambridge-based ARM, which supplies semiconductor intellectual property; and
VMware, a global leader in virtualisation and cloud computing.

Their shares have risen by 22.8 per cent, 107 per cent and 99.2 per cent, respectively, since the
start of 2010, and have vastly outperformed the Nasdaq 100 index, which is up just 0.5 per cent
over the same period.

Phil Pearson, the co-manager of the GLG Technology Equity fund, points to "an unusually high
level of innovation" in the sector. "The rapid rise in mobile internet devices, such as tablet PCs,
netbooks and smartphones, has created a rapid change in consumer behaviour," he says. "Apple's
iPad – if current orders to suppliers for 2011 are any guide – will likely be a $30bn a year
product just 18 months after launch, which would make it, by a wide margin, the biggest
consumer product launch in history."

Mr Pearson says some of the large incumbent bellwethers – big computer and mobile handset
brands – must evolve rapidly or acquire to survive, but the likes of ARM, Apple, VMware and
Autonomy, the second largest pure software company in Europe, seem poised for a "very bright
future".

Mr Wong, of Redmayne-Bentley, also likes ARM, the British firm whose technology is used in
more than 95 per cent of mobile handsets and a 25 per cent of electronic devices. Among the
funds, his pick is the Polar Cap Technology Trust, an investment trust that has made 48 per cent
in the past year. Apple, Microsoft and Google account for 16.5 per cent of its portfolio.

Mr Wong says: "Ben Rogoff, the fund's manager, feels that a 'new technology cycle' is about to
start and that we will experience a number of new product cycles that have started or will start in
the next year or so, so this fund is one to watch."