Thematic investing is all about identifying long-term trends and the investments that stand to benefit from them. This year, we have added Remote Working and Sustainability to our line-up of thematic portfolios. In this article, we will take a deep dive into how we construct the Remote Working portfolio.
- iFAST Research Team | Published on 07 Sep 2021
• Thematic investing is all about identifying long-term trends and the investments that stand to benefit from them. This year, we have added Remote Working and Environmental Sustainability to our line-up of thematic portfolios.
• While the COVID-19 pandemic seems to be easing, thanks to an efficient vaccine roll-out program, many firms are making plans to shift to permanent remote working after witnessing the cost savings and productivity that remote working has brought about.
• For the Remote Working portfolio, we have identified five key industries that will stand to benefit from this change in behaviour. They are: cybersecurity, e-commerce, warehouse and logistic services, digital entertainment, and technology companies that offer collaboration and productivity solutions to facilitate remote working.
• As of 7 September 2021, the Remote Working portfolio is trading a forward PE of 52.3X, PB of 3.1X, while offering a dividend yield of 0.7%.
Thematic investing is all about identifying long-term trends and the investments that stand to benefit from them. Last year, we revamped our Thematic Portfolios, introducing five new portfolios: Ageing Population, China Urbanisation, Digitalisation of Consumption, Millennials, and Smart Cities.
To recap, each of our individual thematic portfolios seeks to capitalise on long-term megatrends, allowing you to participate in some of the world’s most promising investments and also provide diversification to an overall portfolio. We first identify the megatrends that will drive tomorrow’s markets, before sifting through data to target the industries and companies that will most likely benefit from each megatrend. Finally, we apply our in-house rules-based methodology to select up to 20 securities for each portfolio. The selection process focuses on a wide range of financial metrics, including profitability, balance sheet strength, cash-generating power, and valuations.
We have added Remote Working and Environmental Sustainability to our line-up of thematic portfolios this year and in this article, we will take a deep dive into how we construct the Remote Working portfolio.
During the peak of the pandemic last year, most physical activities were forced to shift online due to the social distancing measures implemented. Remote working is no longer an alien concept and most companies and employees have already done so for more than a year.
While the COVID-19 pandemic seems to be easing, thanks to an efficient vaccine roll-out program, many firms are making plans to shift to permanent remote working after witnessing the cost savings and productivity that remote working has brought about. In a survey by Gartner Inc., 82% of CFOs intend to have some employees work remotely even after the pandemic, foreboding a significant change in work models and protocols. The pandemic has effected a new norm, changing the way we live our lives and the way we work.
Chart 1: Shift in mentality among company leaders with regards to remote working
For this portfolio, we have identified five key industries that will stand to benefit from this change in behaviour.
#1: Technology companies that empower individuals to work remotely
Firstly, the crux of remote working lies in virtual work. As many of us have experienced, shifting operations online is an arduous task and involves much preparation. Where a quick chat with your colleague beside you could help to iron out several issues efficiently, getting a hold of them may now prove difficult as they may be tending to other responsibilities.
In line with this, collaboration tools would be essential so employees can collaborate easily and teams may continue meeting their project deadlines. These include communications software, conferencing equipment, and services that allow users to conduct voice calls over the internet. Productivity applications are also vital in ensuring that workers are fully operational from home and can complete their tasks. Thus, in this portfolio, we select firms that offer such products and facilitate telework.
Over the years, cyberattacks have increased in both numbers and severity. As businesses digitalise more of their operations, they introduce more “entry points” into their systems, making them more vulnerable to attacks. This not only puts the firms’ proprietary data at risk but also customers’ confidential data. Should firms suffer a data breach, they stand to face a litany of issues like financial loss from compensation to customers, loss of reputation and trust, and even possible regulatory actions.
Remote working will amplify this need as more employees access sensitive information from their private networks and personal devices. In light of these challenges, effective cybersecurity management has become a necessity across companies, regardless of industry or size.
Thus, cybersecurity providers would be essential in the shift towards remote working. Within our portfolio, we have identified firms that help manage cybersecurity risk by offering firewalls, anti-viruses, VPNs, intrusion prevention systems, and other cybersecurity solutions.
Without a doubt, the pandemic has accelerated the adoption of digital technologies, which have become increasingly essential in our everyday lives. With most people confined to their homes last year, physical interactions were kept to a minimum.
This has led to a rise in global e-commerce sales and penetration rate as consumers learnt to adapt to this new normal. According to GlobalData, nine out of the top 10 global e-commerce companies experienced double-digit growth in 2020. Fast forward to today, while most countries have lifted their social distancing measures, it seems that many customers have changed their purchasing behaviour entirely and switched to conducting their shopping online.
E-commerce thrived during the pandemic and with the rise of remote working, we believe this uptrend will continue, especially in areas such as food delivery. Besides, remote working provides consumers with more flexibility to receive their online deliveries, which will incentivise more consumers to shift to online shopping.
Overall, even if customers are eager to experience in-store shopping again, there is no doubt that e-commerce will be a mainstay in the shopping scene. In our portfolio, we recommend firms that help to facilitate online retail, namely e-commerce platforms that are closely linked to the industry.
#4: Warehouses and Logistics Services
As e-commerce surged, e-commerce firms had to strengthen their supply-chain operations to meet the rising demand, stringing along logistics companies in their climb. Today, customers prioritise speed and reliability and this has given rise to the new expectation of next day delivery. In a survey by McKinsey, 46% of respondents abandoned shopping carts online due to shipping times being too long or not provided. Hence, purchasing decisions can often hinge on shipping times and speedy delivery can spur e-commerce demand.
Logistics are part of the value chain of e-commerce and play a central role in the e-commerce ecosystem. Thus, as people stay at home more and increase their purchases online, the demand for sophisticated logistics services will increase. To add on, e-commerce players are also demanding for more warehouse space to store their goods before moving them for distribution. For this sector, we include industrial companies that derive a significant part of their revenue from supporting the supply chain, from warehousing to international freight and last-mile transportation.
#5: Digital entertainment
Over multiple lockdowns, consumers have also seen a shift in their entertainment patterns, bringing video gaming, eSports, and streaming services into the limelight. Coupled with the rise of remote working, we believe that the demand for such digital entertainment services will continue to rise.
In a period where physical interaction and outdoors activity were discouraged, consumers turned to video games to engage themselves and find communities to connect with. Streaming services have also become peoples’ prime media choice as 12 million customers subscribed to new streaming services like Netflix, Disney+, and Amazon Prime Video during the lockdown. In contrast with traditional cable TV, consumers could now access content from their mobile devices, and subscription fees were generally lower with streaming platforms. Moreover, streaming platforms also produced exclusive unique content that consumers enjoyed.
With more people working remotely and consuming gaming and streaming content at home as entertainment, we believe that the digital entertainment industry will grow even more vigorously. For this sector, we select firms that help to support the digital entertainment industry. This includes not only the main players like gaming companies and streaming platforms but also auxiliary firms like gaming equipment and semiconductor producers.
What you can expect from the portfolio
Remote working may have been an alien concept once but this is no longer the case. While remote working brings with it a new set of challenges, we believe that most companies are still likely to embrace remote working as the new normal.
For this portfolio, we have selected up to 20 stocks and ETFs that will give you exposure to the respective industries that we have highlighted earlier (Table 1). The ETFs selected are the ones that can be found in our ETF Focus List.
Table 1: Holdings of the Remote Working portfolio
|Zoom Video Communications||NASDAQ:ZM||Stock||Virtual Work||Zoom Video Communications offers a cloud service that provides a 3-in-1 meeting platform with HD video conferencing, mobility and web meetings.|
|Microsoft Corp||NASDAQ:MSFT||Stock||Virtual Work||Microsoft Corporation develops software products. Some of its offerings include operating system software, server application software, business and consumer applications software and Internet software.|
|Zendesk Inc||NYSE:ZEN||Stock||Virtual Work||Zendesk develops customer support software, allowing firms to manage customer enquiries through their web-based helpdesk.|
|Fortinet Inc||NASDAQ:FTNT||Stock||Cybersecurity||Fortinet provides cybersecurity solutions. Some of their most well-known products include firewalls, VPNs, antivirus and intrusion prevention products.|
|Check Point Software Tech||NASDAQ:CHKP||Stock||Cybersecurity||Check Point Software Technologies offers network and data security solutions and data management solutions.|
|Ascendas REIT||SGX:A17U||Stock||Warehouses||Ascendas Real Estate Investment Trust invests in industrial properties like business and science park properties, data centres, logistics and distribution centers etc.|
|Sinotrans Limited||HKEX:598||Stock||Warehouses||Sinotrans is a Chinese logistics company, providing freight forwarding services like marine and air freight forwarding and international express. They also provide auxiliary services like supply chain management and storage services.|
|Alibaba Group Holding||NYSE:BABA||Stock||E-commerce||Alibaba Group is a Chinese technology company that offers internet, e-commerce platform, retail and technology services.|
|Meituan||HKEX:3690||Stock||E-commerce||Meituan is a Chinese e-commerce platform for locally found consumer products and retail services.|
|Vipshop Holdings||NYSE:VIPS||Stock||E-commerce||Vipshop is a Chinese company that retails branded products at deep discounts.|
|Netease Inc||NASDAQ:NTES||Stock||Digital Entertainment||Netease operates as a Chinese internet technology company, developing and operating PC and mobile games, advertising services, email services and e-commerce services.|
|Electronic Arts||NASDAQ:EA||Stock||Digital Entertainment||Electronic Arts is the 2nd largest gaming company in the Americas and Europe. They develop and publish video games for consoles, PCs and mobile phones.|
|ETFMG Prime Mobile Payments ETF||NYSE:IPAY||ETF||Payments||ETFMG Prime Mobile Payments ETF gives you exposure to companies involved in digital payments.|
|VanEck Vectors Semiconductor ETF||NASDAQ:SMH||ETF||Semiconductors||VanEck Vectors Semiconductor ETF gives you exposure to companies involved in US semiconductor production and equipment.|
|Global X China Semiconductor ETF||HKEX:3191||ETF||Semiconductors||Global X China Semiconductor ETF gives you exposure to companies developing semiconductors in China.|
|iShares Hang Seng Tech ETF||HKEX:3067||ETF||Technology||iShares Hang Seng Tech ETF gives investors exposure to the 30 largest technology companies in Hong Kong.|
|First Trust Dow Jones Internet Index Fund||NYSE:FDN||ETF||Technology||First Trust Dow Jones Internet Index Fund tracks the US companies essential to the Internet Industry.|
|Source: Bloomberg Finance L.P., iFAST compilations|
You may also find the relevant portfolio metrics as shown in the chart below (Chart 2).
Chart 2: Portfolio overview of the Remote Working portfolio
To reiterate, our Thematic Portfolio is not simply a sector-focused or factor-focused investment strategy. It is a long-term and forward-looking investment approach that seeks to profit from the large-scale forces that will change our world.
We hope that this portfolio would be helpful for investors that would like to capitalise on this trend.