The Big Book of Trends and Thematic Investing

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THE BIG BOOK OF
T R E N D S &
T H E M A T I C
I N V E S T I N G
Moving beyond storytelling
For professional investors
October 2020
C O N T E N T S
Prepared for the future 4
1. Why trends and thematic investing? 6
Interview: Prof. Hendrik Bessembinder 13
2. Three megatrends that shape our world 16
Interview: Steven van Belleghem 28
3. What makes a trend investible? 31
Infographic: From tangibles to intangibles 44
4. From megatrends to sustainable investment themes 49
5. Identifying structural winners 61
Conclusion 75
FOREWORD
P R E P A R E D
F O R T H E
F U T U R E
For hundreds of millions of people, March 2020 was a watershed. Within days, the Covid-
19 pandemic had triggered powerful shockwaves across the world. Entire populations
were put under strict lockdown measures almost overnight. Planes were grounded; and
restaurants, museums and movie theaters were shut while economic activity plummeted
and tried-and-tested health care systems teetered on the verge of collapse.
In financial markets, panic took hold as never before. Global equities suffered one of the
most brutal sell-offs in history, losing up to one third of their value relative to the highs
seen only a few weeks before. Governments and central banks announced unprecedented
rescue packages – on a scale that would have been inconceivable a mere month earlier. As
investors witnessed their certainties vanishing, they scrambled for a safe haven.
The violence of this maelstrom has shaken every aspect of our lives, with just a few
exceptions. Among these are the three megatrends that we believe are shaping our
future. These megatrends – transforming technology, changing sociodemographics, and
preserving the earth – form the bedrock of our trends and thematic investment approach.
They have so far proved resilient to the Covid-19 fallout. In fact, in many cases, the crisis has
accelerated existing long-term trends.
Such resilience has not really come as a surprise. Megatrends are generally not affected
by short-term or sporadic shocks – even if these are profound ones, such as epidemics or
natural disasters. This also holds a lesson for investors. Preparing for the future entails a
little more than just tactically adjusting to market developments and hoping for the best.
It requires a vision of the future, and the ability to express this in an investment portfolio
through clear-cut positioning choices.
A growing body of academic literature shows that a tiny fraction of listed stocks account for
virtually all of the value created in the equity market. The vast majority of companies simply
don’t create wealth for their shareholders – from a long-term perspective. A trends and
thematic approach narrows down the investable universe considerably, helping investors
avoid losers and sharpen their focus on only those companies worth being considered for
investment.
4 | ROBECO | The Big Book of Trends

FOREWORD
Yet, as this publication argues, not all trends and thematic strategies are born equal. A
glossy write-up on, say, the future of robotics or the opportunities created by artificial
intelligence, will not automatically yield real investment rewards. To achieve consistent
long-term outperformance, trends and thematic strategies need a robust and transparent
framework to identify relevant trends and themes, so that investors can capitalize on them.
Our aim in writing this ‘Big Book’ is to explain in detail – and with very concrete examples
– what trends and thematic investing means to us. It is not just about great narratives, nor
is it directed by fads or client appetite. Instead, it is a time-tested and clearly articulated
investment approach, based on a thorough analysis of the powerful megatrends that
shape our socioeconomic environment, and therefore our future.
One of the decisive ingredients in this investment approach is top-notch research.

At Robeco, we believe excellence characterizes our in-house research and makes us stand
out in the investment industry. Ever since our first director, Wim Rauwenhoff, said “every
investment strategy should be research driven”, we have placed great emphasis on the
pursuit of knowledge, in order to help our clients achieve their investment goals.
Another key aspect to this approach is sustainability. Sustainability is a long-term force

for change, which is why we integrate it in every step of our investment processes. This
is obviously the case with our ‘thematic’ strategies, which revolve around the major
sustainability challenges facing humankind, such as water scarcity or resource depletion.
But it also applies to our ‘trends’ strategies, which typically focus more on developments
such as technological innovation and demographic shifts.
Ultimately, and as recent market developments have confirmed, trends and thematic
investing is arguably one of the best ways for investors to prepare for the future. Long-term
changes are difficult to reverse and tend to be structurally underestimated. Investors who
view the world through a trends-and-thematic lens are therefore most likely to see the real
opportunities, avoid losers and focus on the long-run winners.
Mark van der Kroft

Head of Trends and Thematic Investing

1
W H Y T R E N D S
A N D T H E M A T I C
I N V T I N G ?

INTRODUCTION
Over the past decade, trends and thematic investing has enjoyed
FUN QUIZ | QUESTION:
increasing popularity among global equity investors, registering
stellar inflows. Asset managers have responded to this shift What is the average
with abundant product launches, typically backed by appealing company lifespan in the
S&P 500 Index?
narratives. Yet, it requires more than a good story for trends
and thematic investing to generate consistent outperformance. A. 38 years
B. 24 years
It is about uncovering the structural winners of long-term, C. 14 years
socioeconomic shifts.
Index to be 24 years.
average lifespan of a company in the S&P 500
Answer: A 2018 report by Innosight estimated the
The concept Figure 1: AuM for European trends and

Constant change is a defining characteristic of our socioeconomic environment. For thematic strategies
instance, the last couple of decades have been marked by the advent of e-commerce and
AuM in EUR billion
mass migrations to cities in emerging countries. Trends and thematic investing strives to
benefit from these types of profound changes. They include changes related to technology
(technology-driven change), regulations (policy-driven change), and culture and
demographics (sociocultural and demographically driven change).
Structural changes make it difficult for incumbent, dominant companies or business

ecosystems, to stay in control of their market positions. Challenger companies, or up-and-
coming business ecosystems, however, are often able to capitalize on these changes to
enter existing markets or establish new ones. These moves are reflected in constantly
shifting profit pools. Anticipating and taking advantage of these shifts is the main objective
of trends and thematic investing.
More common allocation setups, based on benchmarks, geographies and sectors, often Changing consumption 10
produce disappointing results. Many investors have therefore started turning to trends and Emerging technologies 25
thematic investing as an alternative to help unlock the full potential of active management. Healthy living 14
The forward-looking nature of trends and thematic investing forms a sharp contrast to
Multi-theme 23
widely-used benchmark-based frameworks that rely heavily on conditions in the present.
Sustainability 41
This has prompted a flurry of product launches. Hundreds of thematic funds are currently Source: Broadridge, June 2020. As of March 2020.
available, from basic ETFs to sophisticated funds seeking exposure to multiple megatrends.
Assets under management (AuM) have also surged, propelled by the commercial success
of tech and sustainable funds. In Europe, for example, according to Broadridge, trends and
thematic funds reached EUR 112 billion in March 2020, having attracted a net inflow of 1. Broadridge, June 2020. “Prism European
EUR 51 billion over the last three years.1 Equities”.
7 | ROBECO | The Big Book of Trends The Big Book of Trends | ROBECO | 7
INTRODUCTION
Trends and thematic investing may see its success accelerate further in the near future, due
to the Covid-19 crisis. Broadridge reveals, for instance, that in Europe, thematic funds have
performed considerably better than most other active funds, in terms of flows, since the onset
of the pandemic. During the first quarter of 2020, while the most popular trends and themes
(such as the rise of cloud computing or e-commerce) accelerated, thematic equities recorded
organic growth equaling 5.9% as a result of the EUR 7.6 billion net inflow into these strategies.
This resilience to the Covid-19 shock and its repercussions for the financial markets and
broader economy, contrasts strongly with the blow endured by geographically-focused funds
that suffered negative flows in all regional categories in the first quarter of 2020. Going
forward, trends and thematic investing is expected to capitalize on the move towards a more
robust and sustainable world, supported by an increase in demand from both retail and
institutional investors.
What are trends and themes?

Although trends and themes have a lot in common, they do differ. Trends represent actual
changes or evolutions in our environment and rely on change dynamics. Themes, on the
other hand, represent a common thread or idea regarding these changes or evolutions in
our socioeconomic environment. The subject of these themes therefore relates to societal
topics or ideas that are currently important. If, for example, a change in our socioeconomic
environment would be X, then a trend might be Y and the theme would be Z. See box
‘Trends vs. themes’ for further clarification.
In short, trends investing is more about observing and predicting factual changes and
trying to benefit from those changes. Thematic investing, on the other hand, confines itself
to one topic or set of ideas as its investing domain, and often has a normative angle. As a
result, trends investing shows a greater sensitivity to market movements and tends to be
more dynamically managed compared to thematic investing.
Still, while the broader themes that define thematic investment strategies remain constant,
underlying sub-themes that reflect new growth opportunities, are subject to change as
TRENDS VS. THEMES:

USING ENERGY TRANSITION AS AN ILLUSTRATION
To help the reader get a better understanding of the difference this publication
makes between trends and themes, we consider the current ‘energy transition’
phenomenon, towards cleaner and more efficient energy sources.
– Common trends investing approach: observe how energy composition is

changing, predict where economic profit pools are moving to in the value
chain and position portfolio accordingly.
– Common thematic investing approach: the world is moving to clean energy,
position portfolio around clean energy companies.

INTRODUCTION
trends evolve. Successful thematic investors will anticipate the impact of these changes and
adjust portfolios, while still remaining aligned with broader theme goals.
Another important difference between trends and themes is that themes tend to be viewed
as individual standalone concepts. Trends, however, can be grouped into overarching
megatrends and segmented into different subtrends, forming a sort of hierarchy of trends.
Figure 2 illustrates this, using the digitalization trend (in itself part of a broader, evolving
technologies megatrend) as an example.
Figure 2: Drilling down to a granular level of trends and subtrends – Digitalization example
Overarching digitalization trend
Digital consumer Digital finance Digital enterprise

Global consumer trends Fintech/New world financials Megatrends/Digital innovations
– Gaming – Cashless payments – Move to cloud architecture

– E-commerce – Cybersecurity – Digitalizing business processes
– Streaming video – Digital transaction processing – Facilitating working remotely
– .... – .... – ....
– Etc. – Etc. – Etc.
Source: Robeco
Why is a trends or thematic approach useful for investors?

There are several reasons why investors might adopt this type of approach. The main
reason is that investors gain an analytical edge if they understand the dynamics and
processes involved in secular change, and the macro and microeconomic implications of
these changes. Looking at financial markets from a trends and thematic perspective allows
investors to cut through short-term noise and focus on what really matters in the long run.
Another benefit of a trends and thematic approach is that it typically means abandoning
rigid regional or sector classifications that often provide little added value, both in
terms of evaluating the growth potential of companies and of risk mitigation through
diversification. Trends and themes usually span multiple regions, sectors and business
ecosystems. Looking for consistent exposure to a particular trend or theme ensures the
portfolio is structurally geared toward high growth and economic value creation.
Identifying specific trends and themes, as a first step in the investment process, allows for a
more useful allocation of resources. Therefore, instead of covering all regions, sectors and
individual stocks, which is very expensive and inefficient as there are more than 53,000
listed companies worldwide, full attention can be paid to all securities associated with an
identified, investible trend or theme.

INTRODUCTION
Moreover, a number of recent empirical studies2 have shown equity returns are extremely 2. See: Bessembinder, H., 2018. “Do Stocks
Outperform Treasury Bills?”, Journal of Financial
unevenly distributed across time, industries, countries and individual stocks (see our interview
Economics. See also: Bessembinder, H., Chen,
with Prof. Hendrik Bessembinder). They do, however, correlate with profit stream dynamics, T. F., Choi, G. and Wei, K. C. J., 2019. “Do Global
which, in turn, are mostly driven by long-term trends and themes. A trends and thematic Stocks Outperform US Treasury Bills?”, working
paper. See also: Bradley, C., Dawson, A. and
approach offers the best odds in terms of tracking profit movements and benefiting from them. Smit, S., 2013. “The strategic yardstick you can’t
afford to ignore”, McKinsey Quarterly.
Figure 3: Wealth creation by industry in the United States from 1926-2019

Computer software
Banking
Retail
Petroleum and natural gas
Pharmaceutical products
Electronic equipment
Communication
Utilities
Insurance
Chemicals
Business services
Medical equipment
Machinery
Transportation
Consumer goods
Food products
Trading
Automobiles and trucks
Tobacco products
Aircraft
Restaurant, hotels, motels
Measuring and control equipment
Candy & soda
Beer & liquor
Computers
Business supplies
Wholesale
Entertainment
Construction materials
Steelworks
Apparel
Electrical equipment
Defense
Mines
Healthcare
Shipping containers
Other
Agriculture
Construction
Recreation
Personal services
Rubber and plastic products
Printing & publishing
Shipbuilding, railroad equipment
Textiles
Real estate
Coal
Fabricated products
Precious metals
-500 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500
Total wealth creation (USD billions)
Source: CRSP, Robeco. Market: US. Time period: 1926-2019.

INTRODUCTION
FUN QUIZ | WHO SAID:
‘Wall Street has a few prudent principles; the trouble is that they are
always forgotten when they are most needed.’
A. Gordon Gekko
B. Benjamin Graham
C. Bernie Sanders
Answer: Benjamin Graham, 1973, The Intelligent Investor, Fourth revised edition.
Predictable patterns
Finally, systematic expectation biases lead to predictable behavioral patterns in financial
markets. People have a strong tendency to make linear extrapolations about the future,
based on recent experiences. They therefore often underestimate non-linear change.
In addition, long-term information related to demographic trends or relative industry
returns on investment, for example, tends to be under-utilized. In the stock market, this
means investors typically fail to recognize the disruptive power of new technologies and
socioeconomic trends, and the speed at which they materialize and develop.
These widespread behavioral biases can be turned into sources of alpha. Trends and
thematic investing therefore aims to harvest the positive surprises that result from investors
systematically underestimating the consequences of longer-term trends and themes, played
out over extended periods of time. It is also about identifying and avoiding short-term fads,
that seem promising on paper, but do not reflect any profound structural change.
Trends and themes are not hype

The appeal of trends investing was originally mostly based on storytelling, with many of
its growth topics, such as blockchain or cloud computing, offering attractive narratives.
However, over the years, many products – in particular, the myriad of thematic exchange-
traded funds (ETFs) launched since the early 2010s – have turned out to be gimmicky,
based on fashions that quickly fall out of favor. Ultimately, the performance of many of
them has proved to be disappointing.
Back in 2018, Morningstar estimated almost 80% of thematic ETFs launched prior to
2012, had closed.3 This explains why, until recently, the demand for trends and thematic 3. Lamont, K., November 2018. “Is My Thematic
ETF a Fad?”, Morningstar article.
strategies used to be mainly driven by retail audiences. But the situation is gradually
changing, as many institutional investors have started to question their traditional
frameworks that are frequently structured around benchmarks and indexes.
These frameworks often fail to achieve the desired long-term investment results. This
is mainly due to factors such as the short-term focus of regular benchmarking, or the
potential undesirable risk exposures and the backward-looking nature of benchmark-based
allocation. Nowadays, even cautious, long-term institutional investors understand trends
and thematic strategies can offer far more than just the hype of a good story.
11 | ROBECO | The Big Book of Trends The Big Book of Trends | ROBECO | 11
INTRODUCTION
Trends and thematic investing are not about riding short-lived hypes, quitting at the
right time and then hopping on the next hot topic. The key goal is to identify long-term
opportunities and to capitalize on these. This is why this publication makes the distinction
between megatrends, trends and themes, and most importantly, hypes, crazes, fads and
microtrends. Megatrends are comprehensive changes that have the potential to influence
society, the economy and our lives over the next decade or two.
Sectors move through continuous cycles

This form of investment is a long-term endeavor that strives to benefit from cumulative
economic profits that have compounded over time, while the fruits of high-return
investments are harvested. High-return opportunities emerge under the influence of
profound changes: changes in technologies, changes in consumer attitudes and changes in
how we shape our institutions. These types of changes can be identified as megatrends and
they form the backbone of a robust trends and thematic investing framework.
Such megatrends can bolster an industry’s long-term appeal by providing lasting tailwinds
of growth and sustained profitability. But they also have the power to destroy the fortunes
of an industry by making certain business models or products obsolete or less desirable.
In other cases, they can exert a positive influence by facilitating the emergence of new
business models and profitable growth opportunities.
Companies, industries and sectors move through continuous cycles of birth, growth,
maturity and decline, and corporate birth-mortality rates are high. A trends and thematic
approach should therefore not aim for the very early stages of these cycles, but rather
target the growth and maturity phases. The growth phase is where profitable investments
tend to be made and then they are harvested in the maturity phase.
Investing on the basis of megatrends means focusing less on the daily ups and downs
of economic activity and financial markets. Instead, the asset manager must focus on
capitalizing on the predictability and sustainability offered by multi-year developments. It
is all about identifying those companies that have the potential to benefit from multi-year
developments and that have the proven winning characteristics of a quality company.
Not all trends and thematic solutions are created equal

Before buying a trends and thematic investment product, investors should ensure they
are investing in a strategy that is not blinded by the latest fads, but instead focuses on
thoroughly researched, long-term structural shifts. The strategy needs to be robust and
follow a rigorous and clearly articulated investment process, which includes the necessary
risk management steps.
Robeco has used a rigorous, multi-disciplinary framework to identify three megatrends that
we believe are the most important. These are long-term trends that affect every aspect of our
socioeconomic environment for decades to come. They can be summed up as: transforming
technologies, changing sociodemographics and preserving the earth. Fully understanding
these megatrends will help us identify which companies will perform strongly within them.

INTERVIEW
Photo: Scott Mitchell
‘Most stocks do not

outperform Treasury Bills
in the long run’
PROF. HENDRIK BESSEMBINDER
from Arizona State University
Hendrik Bessembinder is a professor and holds

the Francis J. and Mary B. Labriola Endowed Chair
in Competitive Business at the W. P. Carey School of
Business, Arizona State University. Some of his most
recent research work focuses on the concentration of
wealth creation in global equity markets, where only
a small fraction of stocks account for the majority of
markets returns. We asked him about his findings
and the implications for investors.

INTERVIEW
Your recent work focuses on the skewness of equity returns have delivered disappointing returns in the long run as well, so
and that only a minority of stocks manage to beat short- the implication is not as simple as just ‘buy technology stocks’.”
term bonds. Could you highlight your most important
research findings? Were you surprised by anything? Are there any common traits among companies that
generate large amounts of wealth for investors?
“The two key findings that surprised me, along with
a number of others, are, first, that most stocks do not “I recently released a set of four reports on this subject.2
outperform Treasury Bills in the long run, and, second, that Among other findings I document that top-performing
the net long-term creation of shareholder wealth in the stock firms most often have rapid organic, that is not based on
markets is concentrated in very few stocks.” acquisitions, asset growth, and in particular have strong
cash accumulation. Top-performing firms are more also
What is the difference between buy-and-hold returns more profitable on average, despite higher R&D spending,
and wealth creation? Some stocks have gone bankrupt – and have profit growth rates that exceed their rapid asset
General Motors is an example – but they still make the list growth. Top performing firms in terms of accumulated rates
of companies that have created massive wealth for their of return tend to be younger and have more volatile returns
shareholders. Why? as compared to more ordinary firms, while top performing
firms in terms of dollar shareholder wealth creation tend
“Buy-and-hold returns capture the outcome to a hypothetical to be older and do not have particularly volatile returns.
investor who, after the initial purchase, makes no additional Perhaps surprisingly, given that the distribution of long run
trades, except to reinvest dividends. But this is not the market outcomes is highly positively skewed, which gives rise
experience of shareholders in aggregate, as they fund new to the concentrated wealth creation outcome top performing
equity issuances, receive the proceeds of share repurchases, and firms do not tend to have highly skewed short run returns.”
receive, but do not reinvest, in aggregate dividends. General
Motors is an illustrative example of the distinction: buy-and- Why do you think most stocks have a relatively short life
hold returns were poor, because reinvested dividends lost value in the public stock market?
as bankruptcy approached. Wealth creation was hundreds
of billions of dollars, because GM paid high dividends, and “The economy is dynamic, perhaps to a greater extent
made share repurchases, in the decades prior to bankruptcy than many realize. That said, stocks disappear from the
– these funds were not dissipated as bankruptcy approached. public market – not just because of poor investment results
The wealth creation measure I use is also closely related to associated with being on the receiving end of economies’
the idea of ‘dollar-weighted’ returns, except that I focus on a ‘creative destruction’, but also because companies are
final dollar amount instead of a percentage per year.” frequently acquired, which tends to be a positive event for
investors in the acquired firm.”
The 4% of stocks responsible for the entire wealth
creation during the study, comprise a group of stocks How do you explain the finding that, over time,
that have either been around for a long time and have successively fewer IPO-ed companies, in percentage terms,
therefore had the time to accumulate wealth; or they have been able to generate positive lifetime returns?
constitute a group of younger companies that have
generated extraordinary wealth in a very short time. Can “As you note, my main research results are attributable to
you give us a sense of how the composition of wealth the fact that there is substantial positive skewness in the
builders has changed over time? distribution of long-horizon stock returns. I show, through
simulations, that long-run skewness depends on short-run
“While I have not investigated this issue systematically, it is return volatility. Adam Farago and Erik Hjalmarsson3 show
clear that a small group of technology-related stocks, such as more rigorously that the main determinant of long-run
Apple, Amazon, Alphabet and Facebook, are responsible for a return skewness is short-run return volatility. So, I believe the
substantial portion of the stock market’s recent wealth creation, answer is that companies that have completed IPOs in recent
particularly in recent years. In a new study, I provide an update decades tend to be riskier firms. Of course, that alone does
on this.1 On the other hand, thousands of technology stocks not mean they were bad investments.”

INTERVIEW
‘There are more people who think or claim to be

as talented as Warren Buffett, than there are people
who are actually as talented as Warren Buffett’
Given that small companies are more likely to fail, how more skewness means more of a differential between the mean
would the results of the study change if you eliminated (which can be driven by a few firms) and the median outcome.”
the 30-40% smallest market caps from the study?
You and several colleagues, such as Adam Farago and
“Smaller stocks tend to be riskier and therefore have more Erik Hjalmarsson, have argued that short-term volatility
positive skewness in their long-run returns. The key findings induces skewness in long-term equity returns. What
of my study would have been more moderate if smaller firms conclusion should we draw from this? Should we favor
would have been excluded. But, there would still have been companies whose stocks are less volatile?
positive skewness, and we would still have seen a few firms
bear responsibility for a disproportionate share of net wealth “This depends, in part, on investors’ preferences. It is not
creation.” irrational for investors to prefer positive skewness in returns.
For investors with this preference, greater short-run volatility
You make an interesting observation that the degree of means greater long-run skewness.”
wealth concentration has actually increased over the last
25 years. What do you think is driving that? What would your advice be for active investors, based on
the findings?
“The short answer is that I do not know. But it may be the
case that the internet-based economy has allowed for more “The implications for investors depend on the efficiency of
‘winner-take-all’ outcomes in certain industries.” the market and on the comparative advantage of identifying
in advance which stocks will turn out to be long-run winners
How do you see the skewness of returns evolving over the (or losers). Investors who do not have a comparative
next five to ten years? advantage along these lines, and who do not have a strong
preference for skewness, should stick to low-cost, highly
“I see no reason to think that the future will be markedly diversified, index funds. The reasons as to why have already
different from the past. Stated differently, I am confident that been covered in all the textbooks. In addition, a poorly
a relatively small proportion of stocks will be responsible for diversified portfolio has a less than 50% chance of beating a
a large share of market performance over the next decade. diversified portfolio. If the market is not fully efficient – and
Which stocks that will be is, of course, a much harder I think this is the case – investors with the right comparative
question to answer.” advantage should be working hard to identify the ‘next
Amazon’. The big question is: who has the right comparative
The likelihood of having positive returns and then advantage? There are more people who think or claim to be
outperforming T-bills is positively correlated with size: the as talented as Warren Buffett, than there are people who are
bigger the company, the greater the likelihood of wealth actually as talented as Warren Buffett.”
creation. How does this square with the empirical finding
that small-cap stocks, as a group, produce higher returns 1. Bessembinder, H., 2020. “Wealth Creation in the U.S. Public Stock Markets
over the long term than large-cap stocks (the size factor)? 1926 to 2019”, working paper.
2. Bessembinder, H., 2020. “Extreme Stock Market Performers, Part I: Expect
Does it imply that skewness is much greater for small-cap Some Drawdowns”, working paper. Bessembinder, H., 2020. “Extreme
stocks than for large-cap stocks? Stock Market Performers, Part II: Do Technology Stocks Dominate?”,
working paper. Bessembinder, H., 2020. “Extreme Stock Market Performers,
Part III: What are their Observable Characteristics?”, working paper.
“Yes, skewness is the reason. Small stocks have higher mean Bessembinder, H., 2020. “Extreme Stock Market Performers, Part IV: Can
Observable Characteristics Forecast Outcomes?”, working paper.
returns than large stocks in the long run, this is the ‘small-firm 3. Farago, A. and Hjalmarsson, E. , 2019. “Compound Returns”, Proceedings of
effect’. But they have lower median returns than large stocks – Paris December 2019 Finance Meeting EUROFIDAI – ESSEC.

2
T H R E E
M E G A T R E N D S
T H A T S H A P E
O U R W O R L D
M E GAT R E N D S
A trends and thematic investing approach aims to identify, in a

consistent fashion, which companies will benefit from structural
changes in our socioeconomic environment. This requires a Today, people aged over
rigorous and structured approach. The process starts by identifying 70 represent less than 6%
of the world’s population.
some of the most powerful forces behind these changes, which By 2100, this share is
we refer to as megatrends. The megatrends we have identified likely to rise to…
are: transforming technologies, changing sociodemographics and A. 9%

preserving the earth. B. 16%
C. 21%
percentage could go up to 28%.

attainment and contraceptive needs are met this
2100. If UN SDGs in terms of female educational
people aged over 70 is likely to rise to 21% by
University of Washington, the percentage of
for Health Metrics and Evaluation, part of the
Answer: According to projections by the Institute
Mapping the broader trends and themes landscape

As mentioned in the previous chapter, constant change is a defining characteristic of our
socioeconomic environment. Individual changes can typically be grouped into broader
trends which can, in turn, be grouped into even broader megatrends. Figure 4 depicts
the most important trends highlighted by World Economic Forum (WEF) experts in 2019.
This was based on a survey of close to one thousand members of multi-stakeholder
communities.
The respondents were asked to select the three trends that would be most important in
shaping global development in the next 10 years. For each of the three trends, respondents
had to select the risks most strongly associated with those trends. Their answers
predominantly featured topics that centered on technological innovation, demographic
changes and environmental issues. This is consistent with the three megatrends Robeco
identified for its trends and thematic investing approach.

M E GAT R E N D S
Figure 4: The WEF’s risks-trends interconnections map of 2019
Source: World Economic Forum Global Risks Perception Survey 2018-2019

M E GAT R E N D S
Megatrend 1: transforming technologies

Technological change is arguably the most far-reaching megatrend in terms of creating
investment opportunities. This is because new technologies often lead to non-linear
change and create economic value. The technological megatrend has close ties with ‘the
1. The term ‘The Fourth Industrial Revolution’ was
fourth industrial revolution’1 – as some economists now refer to it. It started a couple of coined in the 2010s by Klaus Schwab, founder
decades ago, but has been gaining considerable traction over the past few years. and executive chairman of the WEF.
Table 1: The four industrial revolutions
First industrial revolution Second industrial revolution Third industrial revolution Fourth industrial revolution
1760-1900 1900-1960 1960-2000 2000-
Energy source Coal Oil, electricity Nuclear energy, natural gas Green energies
Main technical achievement Steam engine Internal combustion engine Computers, robots Internet, 3D printer, genetic
engineering
Main developed industries Textile, steel Metallurgy, auto, Auto, chemistry High-tech industries
machine building
Means of transport Train Train, car Train, car, plane Electric car, bullet train
Source: Robeco. Based on: Prisecaru, P., 2016. “Challenges of the Fourth Industrial Revolution”, Knowledge Horizons - Economics, 8(1).
The fourth industrial revolution is about combining more traditional means of production
with novel digital technologies, such as the internet of things (IoT), artificial intelligence (AI),
robots, drones, autonomous vehicles, 3D printing, cloud computing and nanotechnology –
to name but a few. This combination ensures producers, consumers and other stakeholders
are able to communicate, analyze and act upon information much more quickly and
accurately, increasing their flexibility.
The list of relevant technologies is long, but clearly some are more important than others.
Figure 5 reveals which technologies, business leaders anticipate will have the greatest
impact, based on a survey held by Deloitte in 2019.2 Those that stand out are the internet 2. Deloitte Insights, January 2020. “The fourth
industrial revolution – At the intersection of
of things, artificial intelligence, cloud infrastructure and big data. These are the core
readiness and responsibility”, Deloitte Review,
technologies of the digitalization trend that helps connect organizations, generates and Issue 26.
processes data, and facilitates more well-informed decisions.
Figure 5: The most influential Industry 4.0. technologies
100%
80% 72% 68% 64%

60% 54%
44% 40% 40%
40%
20% 17% 10% 9% 7% 6%

0%
Internet Artificial Cloud Big data/ Nano- Advanced Sensors Blockchain 3D Augmented Quantum Edge
of things intelligence infra- analytics technology robotics printing reality computing computing
structure RPA
Source: Deloitte Global analysis

M E GAT R E N D S
These new technologies have the digital revolution in common, which has deeply impacted
society since the beginning of the millennium. It is epitomized in many ways by the
introduction of the very first smartphones, back in the late 1990s, and the subsequent
spectacular success of the iPhone, first launched in 2007. Today, 5.2 billion people across
the globe subscribe to mobile telecommunications services, which is around 67% of the
world’s total population. This figure is expected to reach 5.8 billion, or 70% of the global
population, by 2025.3 3. GSMA Intelligence, March 2020. “The mobile
economy 2020”.
Recent technological developments have ensured social media, online dating and
e-commerce have spread like wildfire. This has been followed by network-based business
models such as Facebook, Airbnb and Uber, which are much less capital-intensive than
traditional business models. But, the production and financial sectors have also started
embracing digital technologies. Smarter automation, AI tools and faster 3D printers will
help manufacturers reduce production costs significantly.
They will also be able to decrease production time, reduce waste, increase production flexibility
and manufacture closer to the end consumer. A case in point is the IDAM (Industrialization
and Digitalization of Additive Manufacturing) project, a consortium of 12 partners from
the additive manufacturing – as 3D printing is known in the industry – and the automotive
sectors, launched in March 2019 in Germany. Its goal is to build two pilot lines – one at GKN
PM’s factory in Bonn, and the other at BMW Group’s facility in Munich – to demonstrate a
digitalized and IoT-driven production line for 3D printing automotive components.
Disruptive in many ways

Widespread digitalization is disruptive in many ways. In some cases, it can lower the barrier
for companies wanting to enter new or existing markets. For instance, these days, virtually
anyone can start an online retail portal. Digitalization can also, in some cases, help moats
disappear. A moat is a business’s ability to maintain competitive advantages to protect its
market share from competitors, thereby safeguarding its long-term profits.
In other cases, digitalization can help by circumventing the middleman. Previously, a

Chinese, handmade piece of furniture would only enter a European living room if a chain of
wholesalers, importers and distributors were involved. Nowadays, the Alibaba network – to
give an example – can contact a local craftsman directly for a customized order, and get the
product delivered to the other side of the world.
In the healthcare sector, digitalization can help reduce costs and improve services.
Analytical tools will be able to make administrative processes more efficient, provide
new insights into diseases and create new therapies. Genomics will completely transform
how medications are prescribed, as it will be possible to tailor these to an individual’s
genetic profile. Some diseases may even be eradicated through gene-editing technology.
Telemedicine will make care cheaper and more accessible.
The financial sector is seeing fintech companies challenging incumbent universal banks, with
cheaper digital payments, peer-to-peer lending and, even, low-cost robot advice. In addition,
these cheaper and, often, more flexible services are giving a growing number of people
access to financial services they never had before. This is true, not just of large emerging
countries, such as China or India, but also of smaller markets across Africa and Latin America.

M E GAT R E N D S
From FAANG to BATX

At the start, the most successful digital tech companies were US or even Silicon Valley-
based, but Chinese players have caught up quickly and have, in some cases, already
surpassed some of the American giants. Today, top US tech stocks, the FAANG4 – Facebook, 4. Many argue Microsoft, which existed well before
the advent of the internet, but also saw its value
Amazon, Apple, Netflix and Google – are increasingly being challenged by Chinese rival
rise spectacularly over the past decade, should
BATX stocks, Baidu, Alibaba, Tencent and Xiaomi. be included in the mix to form the acronym
FANMAG.
The role of European companies in this shift toward digitalization has been rather
limited so far. This mainly has to do with the fact that the European information and
telecommunications companies of the early 2000s, failed to catch certain technological
waves. This could change, however, as the next stages of the digital revolution are currently
taking place, and are expanding into more traditional areas of the economy, such as
industrial production and financial services.
Technological change is not possible without risks. The biggest risks incurred are threats to
privacy and cybercrime. These types of risks have increased significantly with the surge in
cloud computing and the internet of things. But even here, investors have opportunities to
capitalize on. Over the years, cybersecurity companies have found themselves embroiled
in an arms race with hackers. Firewalls, virus scans, and malware detection need to be
adapted almost continuously to ward off the latest wave of cyberattacks.
Megatrend 2: changing sociodemographics

Sociodemographic trends are generally predictable and persistent. Yet, they also tend
to unfold slowly and have therefore little effect on a day-to-day basis. This explains why
investors frequently overlook or misjudge their longer-term economic impact. Today’s
demographic megatrend is defined by an aging global population, new generations of
digital natives and a rising middle class in emerging countries, such as China and India.
These seismic shifts present both challenges and opportunities.
Figure 6: World population by age group
5
Population (billions)
0
1950 1975 2000 2025 2050 2075 2100
0-14 years 15-24 years 25-64 years 65+
95% prediction interval
Source: United Nations

M E GAT R E N D S
For instance, an aging global population will inevitably have far-reaching consequences for
the labor, housing and financial markets. It will also most likely boost demand for certain
goods and services, including financial services, travel and leisure services, and healthcare
and home care services. Figure 6 illustrates the dominant role older age groups are bound
to play in the coming decades worldwide, as the number of people aged 65+ likely triples
by 2100.
It is probable that the aging global population will, slowly but surely, change long-term
prospects in terms of consumer spending, inflation, economic growth and politics. Aging
populations will also inevitably put increasing fiscal and political pressure on public health
care, pensions and social security systems. For instance, health care spending in OECD
member countries is expected to grow 2.7% annually until 2030, which is significantly
higher than the expected GDP growth.5 5. OECD, 2019. “Health at a Glance 2019 – OECD
indicators”, OECD Report.
Such changes are becoming increasingly visible in countries with the most challenging
demographics. These are typically advanced economies, such as Japan, Germany, or Italy.
However, some emerging and developing countries, such as China or Thailand, are already
experiencing depressed fertility rates, as well as a stagnating and fast-aging population.
These countries often have weaker social security systems, meaning demographic shifts
could lead to even more radical transformations.
The rise of the EM middle class

Meanwhile, increasing wealth in emerging countries is creating a surge of opportunities
for consumer products and services. The global middle class is predicted to grow from
approximately 3 billion people in 2015 to over 5 billion by 2030. The vast majority of this
growth is expected to take place in Asia, notably in China and India. Almost 90% of the one
6. Homi Kharas, 2017. “The unprecedented
billion people that are expected to join the global middle class between 2015 and 2022, expansion of the global middle class”,
will be Chinese or Indian.6 Brookings.
Figure 7: Share of world GDP
70%
65%
60%
55%
50%
45%
40%
35%
30%
1985 1990 1995 2000 2005 2010 2015 2020
Advanced economies Emerging & developing economies
Source: United Nations

M E GAT R E N D S
The rise of Asia’s middle class has significant implications. It is prompting the shift in the
world’s economic center of gravity, from developed to developing countries. It is also
boosting discretionary consumption, as dozens of millions of emerging consumers join the
ranks of the middle class every year. This means they will start purchasing items that are
not basic necessities, supporting the soaring demand for products and services that include
consumer goods and payments.
In a 2019 discussion paper,7 McKinsey predicted that, during the current decade, Asia – 7. Tonby, O., Woetzel, J., Choi, W., Seong, J., and
Wang, P., 2019, “Asia’s future is now”, McKinsey
with China and India leading the way – would fuel half of the total expected consumption
Global Institute.
growth worldwide. By 2030, it is predicted to account for more than half of global
consumption growth. This will make Asia one of the most important markets, not just for
international brands, but also for domestic brands as the bias Asian consumers traditionally
have for western brands, gradually fades away.
Yet formidable challenges remain. For example, India’s tremendous increase in its working
age population, both in an absolute and relative sense, can do little to solve its structural
deficiencies in education or infrastructure, which continue to hamper the country’s growth
potential. Meanwhile, China is facing strong headwinds in striving to maintain its economic
momentum, and its rapidly aging population will soon start to weigh on its economic potential.
The rise of digital natives

Generational shifts have always been powerful drivers of social change. But the advent of
digital technologies since the 1980s and the rise of generations that have grown up with
these technologies, is widening the gap. According to Marc Prensky, who coined the term
‘digital natives’,8 younger generations are used to receiving information at accelerated 8. The term ‘digital native’ refers the generation
of people who grew up in the era of
speeds. They like to parallel process and multi-task. They also prefer graphics to text and
ubiquitous information technology, including
value random access to resources.9 computers, mobile phones and the internet. By
comparison, people from older generations,
who only became familiar with digital systems
These shifts have far-reaching consequences. For instance, a recent study by BCG found as adults, are considered ‘digital immigrants’.
that the Covid-19 pandemic’s impact on consumption habits was more pronounced for
9. Prensky, M., 2001. “Digital Natives, Digital
millennials10 and generation Zs11 than for older generations. In fact, 33% of millennial Immigrants”, On the Horizon.
and ‘Gen Z’ consumers have increased their online spending since the pandemic began,
10. Millennials, also known as “generation Y”
accounting for a net increase of 6%; while 23% of consumers from older generations have usually refer to the demographic cohort born
done the same, achieving a net increase of only 1%.12 between the early 1980s and the mid-1990s
to early 2000s, with 1981 to 1996 a widely
accepted defining range for the generation.
Millennials and Gen Zs are becoming increasingly influential as they currently make up
roughly half of the world’s population and most of the global workforce. This is changing 11. Generation Z usually refers to the demographic
cohort born between the mid-to-late 1990s and
the way our societies think and react, ensuring our priorities evolve as well. Some of the the early 2010s.
traditional milestones that were essential for older generations, such as having children or
12. Source: Bona, C., Koslow, L., Frantz, R.,
buying a home, do not top the list of priorities for younger generations.13 Instead, seeing Nadres, B. and Ratajczak D., June 2020. “How
the world or having a positive impact on society, has become much more important. marketers can win with gen Z and millennials
post-Covid-19”, BCG.
Issues, such as climate change or saving the environment, have also become increasingly 13. Source: The Deloitte Global Millennial Survey
2019.
relevant in the decision-making process of millennials and generation Zs. For example, a
2017 survey14 found that 85% of millennials felt it was “extremely” or “very” important that 14. Source: The Conference Board Global Consumer
Confidence Survey, conducted in collaboration
companies implement programs to protect the environment. For baby boomers (aged 50
with Nielsen Q2 2017.
to 64) and members of the silent generation (aged 65+) that proportion was significantly
lower: 72% and 65% respectively.

M E GAT R E N D S
Megatrend 3: preserving the earth

In just a few years, the need to preserve our planet has become one of the most powerful
forces behind structural change in our societies. While this shift started several decades
ago, momentum really started picking up in the last decade, heralding significant
milestones such as the Paris Agreement, in 2015. The move towards preserving the earth
has been fueled by increased environmental awareness, increased regulation and a
growing scarcity of natural resources.
This megatrend is driving many changes, from more sustainable food production, to
cleaner energy systems, to hybrid and electric vehicles. These changes are often driven
by an increasing scarcity of resources, as well as increased social awareness and tighter
regulation factors. Moreover, people, in particular the younger generations, are becoming
more conscious of the need to preserve our planet.
Consumers across the globe, in survey after survey, have revealed sustainability plays an
increasingly important role in their decision making.15 Moreover, sustainability’s growing 15. This is, for example, one of the key findings of
PwC’s Global Consumer Insights Survey 2020.
influence appears to be about more than just stated intentions – it is actually visible in
purchasing behavior. For instance, a recent paper16 by NYU researchers, found that products 16. Kronthal-Sacco. R., Van Holt, T., Atz, U. and
Whelan, T., 2020. “Sustainable Purchasing
carrying sustainable claims on their package clearly outperform conventional products in
Patterns and Consumer Responsiveness to
the same respective categories. Sustainability Marketing Messages”, Journal of
Sustainability Research.
Figure 8: Growth sustainability-marketed products versus conventionally-marketed products
130
125
Index (base year 2013 = 100)
120
115
110
105
100
2013 2014 2015 2016 2017 2018
Sustainability 5-yr CAGR: 4.45% Total market 5-yr CAGR: 1.35%
Conventional 5-yr CAGR: 0.80%
Source: Kronthal-Sacco. R., Van Holt, T., Atz, U. and Whelan, T., 2020. “Sustainable Purchasing Patterns and
Consumer Responsiveness to Sustainability Marketing Messages”, Journal of Sustainability Research.
The paper illustrated that, in just a few years, sustainability-marketed products had moved
beyond niche positioning and were contributing to over half of the sales growth seen in the
sample of goods studied from 2013 to 2018. During this period, the share for sustainability-
marketed products had grown from 14.3% to 16.6%. Overall, sustainability-marketed
products had grown 5.6 times faster than their conventionally marketed counterparts, and
3.3 times faster than the total market. See Figure 8.

M E GAT R E N D S
Tighter regulations
Increased awareness and public health concerns are putting pressure on governments
and regulators to implement stricter sustainability standards. Tighter regulations to
protect the environment are therefore becoming a powerful catalyst of change. In the
building and construction sector, for instance, new standards on resource conservation and
environmental efficiency have shaken up the industry.
Another telling example involves the automotive sector. According to some estimates,17 the 17. OECD Policy Highlights, Economic
Consequences of Outdoor Air Pollution, OECD
total cost of air pollution will account for 1% of global GDP by 2060, up from 0.3% in 2015.
Publishing 2018.
Combating air pollution by targeting automotive transport is therefore gaining momentum
among governments worldwide. Regulators around the world are pushing carmakers to
reduce their emissions. Failure to meet these targets may force manufacturers to pay hefty
penalties.
Countries such as China are aggressively supporting the Electric Vehicles (EV) market
through subsidies and by implementing restrictions on petroleum-powered vehicles in
smog-choked cities. Similar measures have been introduced in urban areas across the world
and are hastening the demise of conventional cars. Although incremental improvements in
fuel efficiency and exhaust technologies of traditional cars are advancing, the overall costs
of emission compliance are rising.
Figure 9: Emission standards spurring electric and hybrid vehicles uptake
Example European Union: required EV share of new vehicle sales
25%
20%
15%
10%
5%
0%
2016 2018 2020 2022 2024 2026 2028 2030
Needed pure electric vehicle Needed plug-in hybrid electric vehicle
Source: RobecoSAM, ICCT, 2018. Estimates assume fossil fuel car efficiency to improve 1% p.a. and 47g/CO2 per 100 km
for plug-in hybrid EVs
Tighter restrictions and increased public awareness of health issues and climate change
have ensured EVs have entered the mix as a solution for pollution. This means car
manufacturers will be forced to step up their production of EVs, presenting both challenges
and opportunities for the sector. Figure 9 illustrates the pace at which these developments
may unfold. It also signifies the percentage of new vehicle sales that will need to be
attributable to EVs to satisfy EU emission standards.

M E GAT R E N D S
‘Big will not beat small anymore. It will be the fast beating the slow.’
A. Steve Jobs
B. Jack Ma
C. Rupert Murdoch
Answer: Rupert Murdoch, at a press conference in London, as reported by The Guardian on 2 July 1999.
Scarce resources
While the desires of our human societies may be infinite, the resources available to satisfy
them are, by definition, finite. As the global population rises and economies develop,
resource scarcity is becoming an increasingly important factor to consider. Take water, for
instance. While water scarcity has always been an issue for arid climates, an increasing
number of regions across the globe are now maxing out reserves and threatening human
health, local development and global economic growth.
Meeting growing global demands for water supply has fast become one of the biggest
challenges for humankind. If the current levels of water consumption and pollution are
not altered, demand for water may exceed supply by 40% by 2030. This means almost
half of the world’s population will suffer severe water stress. Consequently, countries may
be forced to spend USD 200 billion per year on upstream water supplies, due to demand 18. United Nations Environment Program, Policy
Options for Decoupling Economic Growth from
outstripping cheaper forms of supply – up from historic averages of USD 40 to 45 billion.18
Water Use and Water Pollution, March 2016.
Necessity is therefore the catalyst behind innovation in new water treatment and water
reuse technologies across the globe. Some countries are proving that a little financing,
ingenuity and long-term thinking, can go a long way. Singapore, Jordan and the Gulf States
are just a few water stressed zones that are pioneering and deploying innovation to combat
water scarcity. Their success can be applied to other water stressed areas in the future.
But water is just one of the countless examples that illustrate how resource scarcity is
driving long-term changes. For instance, the auto and aviation industry are increasingly
using alternative materials, such as carbon fibers or titanium, to reduce aircraft and
passenger car weight, thereby reducing energy consumption. Carbon fiber currently
accounts for over 50% of the material used in Boeing 787s and Airbus A350s.
Moreover, addressing resource scarcity challenges is about more than just replacing
traditional materials with alternative ones. It is about improving production processes
to make manufacturing safer and more efficient and to reduce pollution. It is also about
increasing efficiency – for example through reuse and recycling – to achieve cleaner
solutions in extraction, processing, and when using resources and materials.

M E GAT R E N D S
How do our strategies tie in with this framework?

Robeco in Rotterdam and the sustainability experts at RobecoSAM in Zurich have joined
forces to provide our trends & thematic investing offering. These investment strategies
have been designed in line with the three overarching megatrends described in this chapter
– transforming technology, changing sociodemographics and preserving the earth. Within
this framework, the different strategies typically focus on a subtrend or theme, or a set of
subtrends or themes.
Consequently, some of our strategies reflect various megatrends, whereas others may only
tie in with one of these megatrends. For example, the Robeco Global Consumer Trends
Equities strategy focuses on three main trends: the digital consumer, the emerging consumer
and strong brands. This means it is very well aligned with the transforming technologies
and changing sociodemographics megatrends, but less so with the preserving the earth
megatrend. Figure 10 provides an overview of our trends & thematic strategies and how they
tie in with our analytical framework of megatrends, trends and themes, and subtrends.
Figure 10: Overview of trends & thematic investing strategies
Thematic funds Preserving the earth

Trend funds
Sustainable Smart
water energy
Smart
Sustainable materials
healthy living
Smart
mobility
Megatrends
Circular
economy
Digital
innovations
Changing New world Global Fintech Transforming

sociodemographics financials consumer trends technology
Source: Robeco

INTERVIEW
‘We are on the cusp

of the golden age of
digitalization’
STEVEN VAN BELLEGHEM June 2020. The world is slowly coming round after
International keynote speaker being knocked out by a sucker punch to the jaw. The
Covid-19 pandemic struck the global economy at its core,
forcing economic growth to come to a screeching halt. It
is estimated that the economy will shrink by five to ten
Steven van Belleghem is the co-founder of percent in many regions throughout 2020. Grounded
inspiration agency Nexxworks and social media
agency Snackbytes. As an investor he is also
airplanes stand as silent witnesses to the dive the
involved in the fast-growing digital agency economy has taken. And social tensions that have always
Intracto and AI scale-up Hello Customer. Finally,
Steven is also on the board of directors of Plan
been bubbling under the surface intensified after the
International. In addition to his entrepreneurial death of George Floyd. Stock markets took a staggering
activities Steven is also a part-time marketing
professor at the Vlerick Business School and a
plunge in March and April, only to shoot up at an equally
guest lecturer at the London Business School. astounding rate, severely testing investors’ nerves.

INTERVIEW
As the dust slowly settles, we speak with Steven van Digitalization is our current economic leap forward and it is
Belleghem, an expert when it comes to client centricity. The in full swing. According to Perez, each economic revolution
coronavirus has ensured the customer is put first again: is characterized by three distinct phases: the first 20
companies who offer customers superior service, more years comprise the ‘installment phase’, which is marked
than ever before have a competitive edge in these tough by dramatic changes to work and daily life. It is a period
times. This insight will prove to be invaluable to investors, defined by resistance to these new developments, in which
particularly as a ‘winner takes all’ effect has been observed a small group of winners become extremely wealthy. This,
in many sectors over recent years. in turn, leads to inequality and is followed by the second
phase: a period of recession. Once the crisis ends, a period
What does Van Belleghem believe is required to win the of prosperity ensues in which we enter the golden age of
battle for customers? The formula is simple. Van Belleghem the new technology. This third and final phase sees a much
explains: “The ideal customer relationship of the future can wider portion of the population benefit from the new
be characterized by three aspects: more digitalization, more technology as its implementation and scope improves. Van
empathy and more corporate social responsibility.” At a first Belleghem believes we are currently in the transition phase
glance, these two aspects – more digitalization and more between phase two and phase three: “When we look back
empathy – may appear to be mutually exclusive, but Van on 2020 in 2030, we will conclude that this difficult year was
Belleghem points out that they actually reinforce one another. actually the gateway to the golden age of digitalization.” The
“The efficiency of online shopping appeals to customers, but markets may also reflect this as the ‘winner takes all’ effect
so does the human aspect, often found in brick and mortar of the past few years should, according to Perez’ theory,
businesses, which focuses on excellent customer service. gradually start to subside.
Businesses need to offer their customers products of good
quality and good value, that are easily purchased online and “What really counts,” says Van Belleghem, “is the value
that follow up with a great after-sales service. Companies that of a brand. A company’s goal is to get customers to stop
become partners in the lives of their customers win.” thinking ‘I need toothpaste’ and instead get them to think ‘I
want Colgate’. The importance of brands will only increase
The fifth technological revolution in the coming years. Personalization has imposed filters on
Not all companies have been equally successful in making the way consumers view the world. The main challenge for
this transition though. Van Belleghem points out that many businesses is to navigate their way around these filters to
NGOs score high in terms of empathy, which is important engage with the client and build a relationship with them.”
to customers. However, these types of organizations often In this vein, Van Belleghem cites Nike, whose website and
tend to lag behind when it comes to digitalization – meaning online shops alone account for a third of its USD 33 billion
their reach remains quite small. But Van Belleghem believes revenue. Van Belleghem goes on to describe how smart
there are a lot of opportunities out there for businesses technology can help in this regard: “An increasing number of
as well: “The key themes these days all revolve around products contain sensors, telling businesses where, how and
health, climate change, discrimination and inequality. And when consumers use their products. And businesses can use
what’s really remarkable, is that consumers are looking this information to create added value for their customers.”
more to businesses for solutions and answers than to
governments.” The current Covid-19 crisis has played an Privacy and inequality
important role in this. In fact, Van Belleghem thinks that Of course, this concept does have a certain trade off: privacy
we have reached a turning point precisely because of the is sacrificed for user-friendliness. Van Belleghem explains:
pandemic. He refers to the work of Venezuelan Carlota “People generally are quite vocal about the importance of
Perez – a well-known academic who studies the impact of privacy, but their online behavior presents a very different
technological revolutions across the centuries. She argues picture.” He says this only changes in a crisis: “During the 2019
that with the advent of the Industrial Revolution, a pattern protests in Hong Kong, people suddenly started wearing masks
began by which we have an economic revolution of seismic on the street and destroying facial recognition cameras. That’s
proportions every 60 years. Perez claims this sequence is so what happens when trust suddenly evaporates. People didn’t
precise, you could set your watch by it. even want to use their phone to make mobile payments. And

INTERVIEW
now in the West, the privacy debate about coronavirus apps has Digital events are not the only things accelerating at a rapid
kicked off, but at the same time, everyone uses Strava for their rate. “Everything is accelerating at a rapid rate in this trend.
cycling routes.” Van Belleghem believes there is a gap between E-commerce doubled in size in the period between April
what consumers say and what they do – although he applauds and May. The last time such a two-fold expansion occurred,
the debate about privacy and emphasizes it is a good thing. it lasted seven years. It may feel as if we are taking a step
back because of the pandemic, but actually we are taking
The privacy debate is inextricably linked to the digitalization a giant leap forward.” Van Belleghem is confident that the
of our society. And digital security – essential in this day high street will still be there in ten years’ time, but that it will
and age – has undeniably benefited the online security primarily house stores with innovative concepts. Shopping
sector. If a large organization is hacked, the consequences will be a completely different experience to what it is now.
are immediate: hundreds of millions of euros in damage, Van Belleghem elaborates: “Approximately 80% of our
not to mention reputational damage. And what about household purchases are the same each month. This means
fintech? Van Belleghem says: “Until recently, the majority we won’t be going to the mall for laundry detergent in the
of people in countries such as Kenya and Tanzania didn’t future. Refrigerators will come equipped with an algorithm
have a bank account. Nowadays, even people in the most that calculates when we are about to run out of a certain
inaccessible hinterlands have a digital wallet on their first- product, so that it can be ordered on time.”
generation Nokia. This is tangible proof of phase three of
the digital revolution.” According to Van Belleghem, income An optimist’s doom scenario
inequality can be reduced to acceptable proportions through Van Belleghem considers himself an optimist, but refuses
technological developments. However, he admits not all to turn a blind eye to the dark side of artificial intelligence,
issues can be resolved this way. He is referring, in particular, to algorithms, digitalization and personalization of the online
the inequality and disadvantages the black population in the world. He points out, for instance, that this has created a
US face every day. This issue has, of course, come to the fore situation in which we all exist in our own customized bubbles,
as a result of George Floyd’s violent death, which once again making it easier to manipulate our thoughts. Van Belleghem
exposed the huge rifts present in US society. These rifts are cites the 2016 US elections and the Brexit referendum as
then, in turn, magnified on social media and the online world. prominent recent examples of this. Cybercrime is another
obvious threat. Van Belleghem says: “A criminal nowadays
Online meets offline would have to be a real idiot if they decided to put on a ski
We live in a hybrid society that allows us to divide our time mask and rob a physical bank.” He believes, as a society, we
between the online world and the offline world. Yet, these are inadequately prepared for digital calamities: “What will
two worlds are becoming increasingly entangled, especially we do if hackers hold a hospital hostage? Or what about the
as many people now work from home due to the Covid-19 fact that countries such as China, Iran, Russia and the US are
crisis. This has forced businesses to innovate as meetings secretly involved in hacking activities, which could lead to
and events are currently not possible in the offline world. geopolitical tensions?”
Van Belleghem, who is a keynote speaker in more than 40
countries, knows all about this. He is convinced that digital Meanwhile, the corporate world continues to move towards
events will be the next big thing – irrespective of whether this a new and increasingly digitized world, with people such as
is out of necessity. “Businesses can organize state-of-the-art, Bill Gates, Jeff Bezos, Steve Jobs and Elon Musk paving the
live digital events for a select group of clients. But these events way in the last few years. Van Belleghem is a Musk fan: “That
can then have a larger reach by targeting a wider group.” Van man really thinks outside the box. He has the craziest ideas,
Belleghem compares it to a football match: “Suppose you like colonizing Mars! But he’s the one taking those first steps,
have 40,000 people in the stadium, while at the same time, time and time again. He shook up the car industry when he
hundreds of millions of people, who have paid far less, are launched Tesla and now he’s got a plan for a Hyperloop.”
watching the same game via a live TV broadcast. This type of If you realize that – according to Van Belleghem and Perez
hybrid solution can be applied to online events as well. Why – we’re on the cusp of the golden age of digitalization, it
invite 200 people to your event when you could invite 5,000? would then appear that our journey has just begun.
And why invite 5,000 if you could invite 50,000?”

3
W H A T M A K E S
A T R E N D
I N V E S T I B L E ?
INVESTIBLE TRENDS
Identifying promising trends that will reshape our socioeconomic

environment is one thing, but consistently outperforming by
investing in companies benefiting from these trends is another. Which year did Amazon
Robeco’s Trends Investing team has identified three key criteria to report an annual net
profit for the first time?
determine whether a specific trend offers an attractive investment
opportunity: monetization potential, scope and good timing. Good A. 1999
B. 2001
timing in this context means that the trend is ripe for investment. C. 2004
Only trends that meet these three criteria are deemed investible.
in 2001.
founded in 1994, reported its first quarterly profit
the first time in 2004. Before that, the company,
Answer: Amazon reported a full-year profit for
Criterion 1: monetization potential is key in capturing value

Monetization is the process of earning money1 from a business or asset. If a company is
able to earn revenue from its business, this means customers value the goods or services
a company provides and are willing to pay for them. It is important that a company is able 1. In this context, we define the notion of profit as
earning returns above the cost of capital.
to retain part of the value it creates for customers, for itself. For example, a global payment
service provider ensures customers are able to make cashless payments all over the world.
For business travelers and tourists, the value of this service is clear: they do not need to
exchange cash, saving time and improving security levels.
Global payment providers can monetize part of the value they create for customers by
charging a transaction fee, creating a profitable business model. This is a prime illustration
of how the structural move from cash to digital payments has become a monetizable
subtrend. And this subtrend is part of the wider digitalization trend, which in turn is part of
the transforming technology megatrend.
Successful monetization means companies are able to generate economic profit from the
trend they are exposed to. Economic profit can be defined as earning returns that exceed
the cost of capital. The beauty of a monetizable trend is that companies generate economic
profit, while growing that profit at the same time. Continued economic profit generation is
likely to translate into wealth creation for shareholders. This is why monetization must be
considered a key criterion in determining whether a trend is investible.

INVESTIBLE TRENDS
Figure 11: Going cashless around the world
GLOBAL PAYMENTS Countries with the

Proportion of cash and non-cash payments highest proportion of
Cash Non-cash cashless transactions
Based on consumer
payment transactions
GLOBAL AVERAGE NORTH AMERICA EMEA ASIA-PACIFIC ADVANCED

Cash 70% Norway 96%
Non-cash 30% Sweden 88%
Denmark 82%
85% 15% 56% 44% 64% 36% Netherlands 80%
UK 79%
US 75%
Finland 74%
INCEPTION
LATIN AMERICA
Mexico 12%
Malaysia 12%
Nigeria 9%
Colombia 8%
42% 58% Indonesia 2%
Saudi Arabia 1%
Source: ACI Worldwide. Date: 2019
INVESTMENT SHOWCASE: FINTECH

Traditional banks are facing several major trends that are These include access to bank accounts, financial planning,
radically transforming the financial services industry, and robo-powered investment advice services and even mortgages.
that are offering attractive investment opportunities. For State-of-the-art technology will make it possible for clients
incumbent players, the biggest challenge is the revolution to integrate all of their data from their bank, their insurance
triggered by financial technology or fintech. Technology policies, their credit card issuers and even their pension fund
companies and more traditional financial institutions are manager. The types of technologies involved will range from
building new platforms, or radically upgrading existing ones, artificial intelligence, and in particular machine learning, to
to offer their clients an increasingly wide and complex range blockchain. Fintech is currently offering extremely attractive
of online financial services. investment opportunities.

INVESTIBLE TRENDS
Figure 12: Geographical redistribution of global consumer spending
MIDDLE CLASS CONSUMER SPENDING

Outer ring: 2030 in trillions, USD (projected)
Inner ring: 2020 in trillions, USD (projected)
ASIA PACIFIC
USD 36.63
USD 12.57
EUROPE +102% GROWTH

USD 11.61
While increasing Chinese spending
USD 6.68 tops the news, the East Asia Bureau
USD 18.17 of Economic Research forecast that
spending in India and Indonesia
NORTH AMERICA will grow at similar rates.
USD 6.38
SUB-SAHARAN AFRICA USD 1.04

USD 1.66 USD 3.14
USD 1.93 REGIONS
MIDDLE EAST AND CENTRAL/

NORTH AFRICA SOUTH AMERICA
USD 2.68 USD 3.63
Source: Global Economy and Development at Brookings. Date: 2017
Criterion 2: sizing up a trend’s scope

A trend must be far-reaching enough to allow companies to earn and grow revenues, by
building a business that capitalizes on the trend in question. One way to measure scope is
by looking at the number of consumers and businesses influenced by a given trend. A good
example of a far-reaching trend is the emerging middle-class subtrend, which is part of our
changing sociodemographics megatrend.
Income levels are rising rapidly in many developing countries, particularly in Asian
countries such as China, India, Indonesia or Vietnam. Billions of people will join the ranks
of the middle class in the coming decades. As income levels rise, expenditure on more
discretionary items, such as cosmetics, fashion and entertainment, will increase significantly.
This change is a key factor in driving demand for these products, which will be sold by both
local and global companies.

INVESTIBLE TRENDS
Investors can benefit from the emerging middle-class trend by investing in companies
selling services and products that are set to experience substantial, long-term demand
growth. For example, L’Oréal, the world’s largest personal care products maker in terms of
sales, saw its sales in Asia rise by 112% over the last 5 years, from EUR 4.56 billion to EUR
9.66 billion. Asia is currently the company’s largest and fastest growing market, having
surpassed Western Europe in 2019.
Another important facet in measuring scope is ensuring enough companies are listed on
the stock exchange, with pure-play exposure to the trend. Additionally, these companies’
market capitalization must be sufficient, both at the individual and group level, to merit
significant investment. In other words, a strategy that aims to benefit from a given trend,
must offer investors sufficient capacity.
The structural move away from brick and mortar stores to e-commerce, which is part of
the broader digitalization trend, illustrates this point. Investors can benefit from this shift
as there is a wide range of companies to invest in, including Alibaba in China, Amazon in
the US, Mercado Libre in Latin America and Zalando in Europe. These four companies have
market capitalizations ranging from USD 19 billion to USD 1.5 trillion, and derive most, to
all, of their revenue from e-commerce.
Criterion 3: time to hit the road

The third element in determining whether or not a trend is investible, is its position in the
life cycle. To be deemed investible, a trend must be in the right phase of its life cycle: not
too early or late, but just at the right stage. One way to evaluate this is by using Gartner’s
‘hype cycle’ as a framework. In the early stages of a trend, an innovation has just occurred
and investors tend to be overexcited. Adoption is still low and clear, and profitable business
models have not been found yet.
Figure 13: Gartner’s ‘hype cycle’
EXPECTATIONS
Technology Peak of Trough of Slope of Plateau of

trigger inflated disillusionment enlightenment productivity
expectations
TIME
Source: Gartner, 2020

INVESTIBLE TRENDS
Figure 14: The four pillars of cancer treatment
Chemotherapy
Radiation
therapy
Surgery
Immuno-oncology
Source: Global Data PharmaFocus, 2017.
Investors therefore do not have sufficient information to determine whether a trend will
become a driver of long-term growth and present a real investment opportunity. For instance,
within the transformative life sciences trend – part of the transforming technology megatrend
– we have identified immuno-oncology as a promising area for investments. Immuno-oncology
focuses on treatments that activate the body’s immune system to help it fight cancer.
On paper, immuno-oncology has the potential to become the fourth pillar in cancer treatment,
in addition to chemotherapy, surgery and radiation therapy (see Figure 14). It would
therefore appear to satisfy both the monetization and scope criteria of an investible trend.
However, immuno-oncology research and technology are still in the early stages, making it
difficult to determine which companies will actually benefit from these innovations.
A shakeout often occurs after an initial peak of enthusiastic expectations, leaving only the
fittest players. Such a shakeout typically coincides with many companies exiting – who
initially seemed extremely promising, but ultimately failed to deliver consistent growth and
profitability over time. Companies that currently show promise in terms of their prospects in
immuno-oncology, may well turn out to be disappointing investments in the next few years.
Gartner’s ‘hype cycle’ stipulates that the optimal stages for investment are the ‘trough
of disillusionment’ and ‘the slope of enlightenment’. In these stages, investors tend to
underestimate the chances of a market experiencing long-term, profitable growth. This
is currently exemplified in the video game industry: companies are moving away from
traditional risky business models that rely on the success of a few blockbuster titles, to more
predictable subscription-based models.

INVESTIBLE TRENDS
Figure 15: Gamers and eSports revenues
Total revenues 2020 Global gamers

in millions USD in millions per region with year-on-year growth rates
USD 1556.7
+14.9% CAGR
28% Asia-Pacific 1,506 +7.7%

USD 1100.1
USD 950.6 +15.7% YoY North America 203 -0.9%
+22.4% YoY 2020 total
USD 1100.1 55% Latin America 259 +4.3%
USD 776.4 +7.7% YoY
Europe, Middle
9% East & Africa 758 +6.6%
7%
2018 2019 2020 2023

Source: Newzoo, 2020
These new business models are very attractive to investors. They usually generate greater
profitability and earnings visibility, compared to the traditional business models that have
prevailed until recently. This shift, and the potential of a 2.7 billion global population of
gamers,2 suggests the time is ripe for investors to gain exposure to the video game industry, 2 Source: Newzoo Global Games Report, 2020.
especially as this population is bound to grow and therefore increase spending on games.
Once investors’ portfolios have been exposed to a specific trend, developments should
be closely monitored to ensure they have not reached the plateau phase. This stage is
characterized by low or no sales growth, when companies start focusing on costs instead
of growth. At this point, investors should consider exiting the trend. This is why investing
too late in a trend means missing out, at least partially, on the peak period for investment
returns, economic profit and growth.
‘After 25 years of buying and supervising a great variety of

businesses, I have not learned how to solve difficult business
problems. What I have learned is to avoid them.’
A. Jack Bogle
B. Warren Buffett
C. George Soros
Answer: Warren Buffett, Berkshire Hathaway 1989 Chairman’s Letter.

INVESTIBLE TRENDS
TRENDS SHOWCASE:
HUMANIZATION OF PETS
While the most attractive trends investing narratives often have to do with
technology and innovation, this is not always the case. Some timeless things,
such as the bond between humans and animals, can turn out to be an exciting
playground for investors. This is true of the pet care market, as pet ownership is
rising globally and the amount owners spend on their pets keeps on increasing.
The pet care market offers moderate, but stable growth prospects. It is currently
worth USD 190 billion and is expected to grow 5% annually.3 This expected
growth will mainly be driven by the surge in pet numbers and increased
spending per pet – related, for example, to fresher, healthier food and better
animal healthcare.
Pet ownership is not just rising globally – owners are also spending more on
their loyal companions. These non-human companions are increasingly been
treated as family members, with all the perks and benefits this brings. Some
millennials even see their pets as genuine alternatives to children.
But the pet care market does not just offer moderate growth prospects, it also
presents a relatively resilient profile. In the US, for example, pet care spending
continued to grow even during the financial crisis of 2008-2009. In fact, the
most recent increase in ownership, driven in some countries by increased
adoption and fostering by people confined to their homes, could result in the
industry experiencing a tailwind soon.
Another interesting, recent development is the emergence of new types

of services, particularly in the online retail sector. For example, Chewy.com
offers ‘Autoship’ subscriptions that regularly ship pet food to people’s
homes. The ‘humanization’ of pets is a typical example of the type of broad
sociodemographic shift that Robeco aims to benefit from with its Global
Consumer Trends strategy.
3. Source: Global Market Insights, June 2019

INVESTIBLE TRENDS
Don’t tread on thin ice

All three key criteria – monetization potential, scope and good timing – must be
simultaneously met to deem a trend investible. If one ingredient is missing, the identified
trend should not be considered investible. To illustrate how rigorously investors should
follow this rule, some examples have been included of non-investible trends that were
promising in two of the three key criteria.
Big bang, no bucks

If the monetization potential is missing, companies will not be able to build a profitable
business. This could be, for example, because the market is too competitive. If companies
are unable to generate and secure sustainable competitive advantages, such as a network
effect, an installed base, or a strong brand, they will not be able to achieve sufficient
economic profit and will not survive in the long run.
Figure 16: Blocktech in financial services
APPLICATIONS & SOLUTIONS

BROKERAGE EXCHANGES SOFT WALLETS HARD WALLETS INVESTMENTS
MICROTRANSACTIONS
TRADING PLATFORMS CAPITAL MARKETS MONEY SERVICES

MERCHANTS
COMPLIANCE
FINANCIAL DATA
ATMs
PAYMENTS
BANKS
TRADE FINANCE
PAYROLL & INSURANCE
MIDDLEWARE & SERVICES

SERVICES SOFTWARE DEVELOPMENT GENERAL APIs SPECIAL APIs PLATFORMS SMART CONTRACTS
INFRASTRUCTURE & BASE PROTOCOLS

PUBLIC SPECIAL PAYMENT MINERS
Source: Virtual Capital Ventures. 2015.

INVESTIBLE TRENDS
This is the case with blockchain. This technology has attracted considerable attention from
investors, and has been used in numerous ways that include tokenized assets, decentralized
administration and trustworthy digital contracts – to name but a few related to the financial
sector. Bitcoin itself has proven to be a successful application of blockchain. And yet,
companies able to monetize this technology have remained conspicuously absent, at least
up to now.
This is partly because blockchain is a distributed system, meaning there is no central

organization that controls it. Potential users therefore do not have an obvious ‘tollbooth’
that they have to pass through – as they do with centralized payment networks such as Visa
or Mastercard. Capturing value through service or transaction fees could therefore prove to
be difficult, as blockchain participants can easily circumvent those charging fees.
There is a plethora of companies that are actively using blockchain, but investment
opportunities for public investors remain paltry. This would only change if there was a
significant increase in the number of companies generating substantial and growing
revenues and profits from this type of technology. This could, however, take years or may
never happen, which is why blockchain is not an investible trend, despite its growing use.
Not taking baby steps

There are two main reasons why a trend’s scope may not be broad enough to make it
investible. Firstly, growth opportunities emanating from the trend may be too scarce or
weak, preventing companies from becoming large businesses. Secondly, the investment
universe related to this trend may be too small, in terms of market capitalization or the
number of pure-play companies.
For example, the global rollout of 5G cellular networks could, in theory, present an
attractive investment opportunity – but in practice, the situation is more complex. The
advent of 5G is part of a broader trend towards faster and denser telecommunications
infrastructures that has been in place for a long time now. 5G could trigger new consumer
behaviors, or amplify existing patterns, and create additional business opportunities such
as the internet of things or virtual reality.
However, the number of pure-play companies working on 5G remains limited, many

companies derive only a small percentage of revenue from 5G. One way to overcome this
is to invest in companies owning digital infrastructure, such as cell towers and data centers.
These stand to benefit from increased data transfer volumes and demand for critical
infrastructure. Taking this approach enables investors to circumvent the lack of pure-play
companies, while still participating in the global upgrade of our telecommunications
infrastructure.

INVESTIBLE TRENDS
Figure 17: Projected global 5G subscriptions (in millions)
1
2019
2
3
2
6
2020 10
18
5
35
2021 49
89
11
99
2022 132
446
688
22
215
2023 274
831
1,342
38
318
2024 386
1,159
1,901
Middle East and Africa Europe Americas Asia and Oceania Total
Source: Raconteur. Date: 2020.
Counting chickens before they hatch

Ensuring a trend is in the right stage of its life cycle is crucial when trying to avoid investing
in a trend that is either not mature enough, or on the verge of decline. RegTech firms provide
a good illustration of this. RegTech is short for ‘regulatory technology’, and may not appear
very exciting at first, but can free companies from legacy systems and save costs and time
by automating and streamlining regulatory processes.
The rationale behind increased demand for RegTech appears to be strong, given the broad
trend towards stricter and more comprehensive regulation. This can be seen in a number
of diverse areas such as environmental protection, money laundering or financial stability
enforcement. For instance, since the onset of the global financial crisis in 2008, banks have
paid more than USD 160 billion in fines for non-compliance with anti-money laundering
laws, oversight failures and foreclosure abuses.4 4. Medici: “How banks can effectively manage
regulatory changes”. Date: 2019
Key areas where RegTech firms can add value are regulatory reporting, identity
management and transaction monitoring. Financial institutions are currently hiring
numerous teams comprising staff who are specialized in know-your-customer (KYC)
and anti-money laundering processes. What’s more, 10 -15% of their total workforce is
dedicated to governance, risk management and compliance.5 Costs could be cut and 5. BBVA, Digital Economy Outlook. Date: 2016
efficiency could be increased with RegTech solutions. Yet, RegTech remains in the early
6. See: Kostic, D. and Van Oerle, J., 2019.
stages of its development despite these promising prospects, and opportunities for “RegTech - tackling the Achilles heel of the
investing in listed companies are scarce.6 financial sector”, Robeco white paper.

INVESTIBLE TRENDS
Figure 18: RegTech vs compliance spending in billion USD
300 280
250
200
150
115
100
70
50
18
0
2018 2023
26% 41%
RegTech spending Compliance spending
Source: Juniper, Medici, Robeco. Date: 2019.
When monetization, scope and good timing intersect

If a trend satisfies the monetization, scope and good timing conditions, investors may move
on to the next stage of the investment process and start looking for the best way to get
exposure to this trend. Trends that check all three boxes help companies capture value by
allowing them to build profitable business models. They also give investors ample opportunity
to allocate capital and revenues and offer bright, long-term market growth prospects.
TECH IS TOP
The transforming technology megatrend is responsible for most investible
trends, rather than changing sociodemographics and preserving the earth. The
reason for this is twofold. Firstly, non-linear change resulting from technological
advances tends to create better alpha opportunities. Secondly, new technology
creates economic value, whereas other megatrends result, in most cases, in the
migration or redistribution of economic value.
Technological advancements create new profit pools, because efficiency

increases. In other words, more can be done with less. For example, e-commerce
gives consumers access to a wider range of products and saves them from
having to visit physical shops. The preserving the earth megatrend, on the other
hand, has triggered the switch from combustion engines to electric vehicles,
resulting in a shift of economic value.

INVESTIBLE TRENDS
Looking for the sweet spot

Digitalization is a good example of an investible trend that has facilitated the emergence of
subtrends in areas such as consumer spending or financial services. Consumers increasingly
shop online, instead of going to a physical store. They also listen to music through
streaming platforms, rather than buying CDs and DVDs. Technological improvements –
including faster, more stable internet connections, powerful smartphones and cashless
payments – are the reason many businesses have been able to grow from small ventures in
garages into massive companies with a global reach.
Figure 19: Investibility of trends and themes
Too small
– Insufficient total market cap
– Insufficient # of companies
– Insufficient growth opportunities
Too
small
TIMING x MONETIZATION
Investible
Too Too
competitive early
x x
Too competitive Too early
– Too many competitors – Trend too immature
– Insufficient sources of SCOPE – Too many ‘question
sustainable competitive marks’
advantage – Insufficient # of
– Insufficient economic economically
profit generation profitable companies
Investible trend or theme

– Sufficient size
– Sufficient monetization opportunities
– Sufficient # of economically profitable companies
Source: Robeco
Digitalization is shaking up numerous sectors, including consumer goods and financial

services. For instance, companies are increasingly turning to cloud computing services,
to avoid using their own servers for processing and storing data. Meanwhile, factories
are increasingly relying on robots to improve efficiency and automate manufacturing
processes. Profitable investment opportunities are available for investors, provided they
pick the structural winners of the digitalization trend.

From tangibles to intangibles
Megatrends are the long-term shifts that shape our socioeconomic environment
through time. They are the moving forces behind economic development.
A G R I C U LT U R A L INDUSTRIAL P OS T- I N D U S T R I A L I N F O R M AT I O N KNOWLEDGE
ECONOMY ECONOMY ECONOMY ECONOMY ECONOMY
1 2 3 4 5
AGRICULTURAL ECONOMY Farming
Land
Dominant asset:
Land
Top company:
Dutch East India
Company (VOC)
Richest person:
Jakob Fugger
Barter Irrigation
Fertilizers

1 2 3 4 5
International Transportation
INDUSTRIAL ECONOMY trade networks
Factories
Main innovation:
Cumbustion engine
Dominant asset:
Capital
Top company:
Standard Oil
Richest person:
John D. Rockefeller
(Standard Oil)
Workforce Manufacturing
Raw
materials

1 2 3 4 5
Information
POST-INDUSTRIAL ECONOMY technology Robotization Know-how
De-industrialization
Main innovation:
Transistors
Dominant asset:
Installed base,
know-how
Top company:
IBM
Richest person:
J. Paul Getty
Outsourcing Telecommunications
Installed Services
client base

1 2 3 4 5
Computing Flexible Intellectual Global

INFORMATION ECONOMY power production property IT networks
Global
supply chains
Main innovation:
Internet/worldwide web
Dominant asset:
Intellectual capital,
networks
Top company:
Microsoft
Richest person:
Bill Gates
www
Digital Internet
technologies
Video Just-in-time
games

1 2 3 4 5
Global
communication Cloud
networks computing
KNOWLEDGE ECONOMY Data security Connectivity
Drone Artiﬁcial
delivery intelligence
Main innovation:
AI/machine learning
Dominant asset:
Customer capital,
auto-learning
algorithms
Top company:
Amazon
Richest person:
Jeff Bezos
Customer Big data

insights
Social media Innovation

4
F R O M
M E G A T R E N D T O
S U S T A I N A B L E
I N V E S T M E N T
T H E M E
S U S TA I N A B L E T H E M E S
The search for attractive investment themes starts with identifying

enduring challenges that create obstacles for sustained growth
and prosperity. Megatrends will exacerbate some obstacles, For the world to reach net-
neutralize others, and even spawn new trends – some positive, zero emissions by 2050,
additions of renewable
some negative. Sustainable thematic investing is about navigating power capacity would need
the complexity of these trends and their aggregate effects on to average around ………
the 2019 annual record.
business and society in order to discover solutions that bring
transformative change and pathways of sustainable growth. A. Twice
B. Four times
C. Six times
average around four times the 2019 annual record.

of renewable power capacity would need to
huge increase in demand for electricity, additions
International Energy Agency (IEA), to meet the
Answer: According to a 2020 report from the
Viewing trends through a sustainability lens

Discovering sustainable themes begins with the conviction that capital in all its forms –
financial, natural, human, and social – should be optimized for both present and future
generations.1 The present business ecosystem, however, is not maximizing total capital. Too 1. “Sustainable development is the kind of
development that meets the needs of the
much capital is squandered by shortsighted companies driven by the pursuit of short-term
present without compromising the ability of
profits. These companies gobble up and spit out resources at warp speed, indifferent to the future generations to meet their own needs.”
negative externalities society suffers as a result. Our Common Future. The Brundtland Report,
1987. United Nations World Commission on
Environment and Development.
Still other, seemingly more deserving, companies employ capital to chase problems with
trivial value potential. This is especially true when one considers some of the global issues,
like carbon emissions, uncontrolled waste, and water insecurity, that cause enormous
environmental damage and reduce the economic potential of billions across the globe. As
one socio-entrepreneur writes, “there are plenty of products that attempt to leverage the
latest technological trends without giving much thought to the importance of the problem
being solved.”2 2. Marmer, M., April 2020. Transformational
Entrepreneurship: Where Technology Meets
Societal Impact. Harvard Business Review.
Sustainability challenges, on the other hand, offer endless opportunities for creating
enduring value potential. Low-end estimates put business opportunities that contribute to
the SDGs3 at USD 12 trillion by 2030.4 And what is now an opportunity will soon grow into 3. For more information on the United Nations
Sustainable Development Goals (SDGs),
an absolute business imperative. According to the UN Principles for Responsible Investing
please visit https://www.un.org/sustainable
(PRI), achieving the SDGs will be key in driving global economic growth on which corporate development/sustainable-development-goals/
earnings are predicated.
4. International Finance Corporation (IFC), World
Bank, Annual Report 2018, p. 48. Redefining
Therefore, the first step in selecting a sustainable investment theme involves identifying Development Finance.
sustainability challenges that have yet to be addressed by markets in a meaningful way.

The value proposition of sustainable challenges

Most sustainability challenges are marked by excess: excess use of resources, excess
consumption, and excess inequality. And problems of excess bring excessive consequences,
like excessive waste and pollution, excessive depletion of resources, excessive carbon
emissions, and excessive healthcare spending, which are felt across environmental,
economic, and social spheres.
But the good news is that, though this damage is significant, it is matched by significant
value potential.
MAJOR SUSTAINABILITY CHALLENGES

Water scarcity – By 2050, up to 5.7 billion potential of a circular economy where waste is reduced,
people around the globe will live in areas of recycled, or integrated into other products is estimated at
water scarcity.5 Meanwhile, water consumption USD 4.5 trillion.15
worldwide is dramatically increasing – according to the UN,
70 liters of water are needed to produce just one apple.6 The The tolls of transportation – Transport is
global economic losses from inadequate water supply and responsible for nearly 30% of the EU’s total
sanitation were estimated at USD 260 billion per year.7 CO2 emissions.16 In addition, traffic transport
significantly contributes to toxic airborne particulate that
Global health – Over the last two decades, global damages respiratory health. In the US, traffic congestion costs
health spending in real terms grew by 3.9% p.a., drivers USD 88 billion in lost revenues annually.17 Outdoor
while global GDP grew only 3.0%.8 The incidence of air pollution will cause an estimated 6-9 million premature
preventable chronic diseases like obesity, diabetes, stroke, and deaths at a cost of USD 2.6 trillion per year by 2060.18
cardiovascular diseases is also rising rapidly. In the US, the cost
of direct healthcare treatment for chronic health conditions
totaled USD 1.1 trillion; equivalent to nearly 6% of the nation’s 5. United Nations Water Facts, unwater.org
6. World Economic Forum, United Nations Food and Agricultural Organization,
GDP.9 2019.
7. Global Water Partnership / OECD, Report of Task Force on Water Security and
Sustainable Growth, 2015.
Climate change and CO2 emissions – Increased 8. WHO, Global Spending on Health: A World in Transition, 2019.
energy demand and carbon intensity will push 9. Milken Institute, 2016.
10. OECD, Environmental Outlook to 2050.
energy-related carbon emissions to 45 Gigatons of
11. Economist Intelligence Unit, 2019.
C02 equivalents p.a. by 2050.10 This figure should be ‘net zero’ 12. “The New Plastics Economy, Rethinking the Future of Plastics”, World
to avert a climate emergency. Climate change could cost the Economic Forum, Ellen MacArthur Foundation, McKinsey & Co., 2016.
13. Whiting, K. (2018, November). “This is how long everyday plastic items
world nearly USD 8 trillion by 2050, or 3% of global GDP.11 last in the ocean”. World Economic Forum and the National Oceanic and
Atmospheric Administration.
14. “What a Waste 2.0: A Global Snapshot of Solid Waste Management to
Resource destruction/depletion – Global growth 2050”. The World Bank (2018).
means more consumption and more trash. By 15. “Waste to Wealth: Creating Advantage in a Circular Economy,” Accenture
(2015).
2050, there will be more plastic than fish (by 16. European Parliament (2019, April). www.europarl.europa.eu/news/en/
weight) in the ocean,12 and plastics can take up to 500 years headlines/society. See ”CO2 Emissions from Cars: Facts and Figures.”
17. Inrix, 2019 Global Traffic Scorecard. www.inrix.com/press-releases/2019-
to decompose.13 The rate of global waste production will be
traffic-scorecard-us/
nearly twice that of population growth by 2050.14 The value 18. The Economic Consequences of Outdoor Air Pollution. OECD (2016, June).

A framework for assessing sustainable challenges and solutions

Preserving the earth, using resources more efficiently, eliminating inequalities, and
improving health are obvious and noble goals. But, how can lofty goals translate into
actionable investment ideas? A framework is needed to gain a deeper understanding into
the nature of sustainability challenges and how they interact with other secular trends
playing out more broadly in society and the global economy.
Understanding how sustainability challenges interact with secular trends

Sustainable thematic investing should avoid focusing solely on unsustainable status quos
or on negative developments. This can cause investors to lose sight of positive sustainability
trends. Although many sustainability challenges, like scarce resources and environmental
damage, are reflective of a suboptimal status quo that leaves society with a net negative
balance, some trends are clearly good, leading to better outcomes across social and
economic spheres of life.
Many positive trends have, in fact, emerged in response to earlier, unsustainable trends.
For example, even as the prevalence of obesity, diabetes, and chronic disease is rising
worldwide, younger generations are spawning countertrends in disease prevention.
Millennials and Gen Zs, who see balance and well-being as central to their cultural identity,
are taking health and wellness seriously and taking charge early in life.
Meanwhile, technological trends are merging with social, fitness and nutrition trends to
create a healthy lifestyle bundle that promotes health, reduces disease, and decreases
healthcare costs for both the individual and society. Similarly, trends in electrification are
catching on across multiple sectors including utilities, transportation, and buildings and
construction which, in turn, are converging to change the world’s energy mix over the long
term. As more sectors embrace electrification to power processes, there will be less demand
for fossil fuels.
Prioritizing disruptive technologies and transformative solutions

Many unsustainable trends are stuck in a state of inertia. They are moving in the same
direction, at a constant speed, and highly resistant to change from external forces.
Throughout history, innovation has provided the monumental force needed to disrupt this
inertia within societies and industries.
For example, telemedicine and better diagnostic technologies have the potential to radically
shift healthcare from later-stage treatment in hospitals to early-stage prevention in private
homes. Likewise, decentralizing energy grids to micro-energy-producing households, will
reduce the natural monopoly of utilities. Electric motors and battery storage are replacing
internal combustion in vehicles and transportation, reducing our reliance on fossil fuels.
Technology is critical, not only for industry disruption and transformation but, more
importantly, for sustainable disruption and transformation. Innovative technologies
improve the efficiency and scalability of sustainable solutions. The value of any technology
is directly proportional to its reach. The more broadly a technology can be applied to solve
problems and create cost and resource efficiencies, the greater its value for business and
society. Technologies that can be applied to multiple sectors and industries, carry the most
value potential and provide the most robust opportunities for growth and investment.

The term ‘disruptive change’ immediately conjures images of cutting-edge concepts such
as ‘digitalization’, and ’network platforms’. But technology is an enabler in less exciting FUN QUIZ | WHO SAID:
industries as well. Improvements in water testing and analytics is enabling growth across
sectors as diverse as industrial utilities and biopharmaceuticals. Attractive, sustainable ‘Global warming pollution,
themes will capture these technologies that drive sustainable growth across multiple indeed all pollution, is now
industries and create sustainable returns. described by economists
as an “externality.” This
Reviewing government action and regulation
absurd label means, in
Effective policies are often needed to support and encourage the development and
essence: we don’t need
adoption of new technologies in the market. Regulation therefore plays a crucial role in
to keep track of this stuff
driving the direction and speed of trends. Regulatory measures are often paired with other
so let’s pretend it doesn’t
policies that increase the value proposition of end-market products and technologies.
exist.’
For example, in many countries, governments eager to reduce waste have introduced bans
A. Mark Carney
on single-use plastics and set quotas for recycled content in bottles, bags and packaging.
B. Al Gore
Meanwhile, regulations on CO2 emissions combined with vehicle subsidies, have
C. Ursula von der Leyen
stimulated R&D in electric motors and battery technologies, helping propel the electric
vehicle market forward.
Law School , 18 September 2006.
Initiatives and directives from non-governmental and intergovernmental organizations, Answer: Al Gore, Address at New York University
such as the UN, have also been significant in setting the tone and priorities that shape
global standards, especially with respect to issues where markets have failed to respond
adequately. Such initiatives target a wide range of sustainability challenges, including
human rights and labor practices, fair trade, equitable and inclusive economic development,
and environmental protection.
Assessing the maturity and scalability of sustainable solutions

Not all trends will have the same value proposition, nor will they unfold at the same speed.
Some can mature quickly and radically alter an industry in the span of a few years, while
others might need decades to ripen. Thorough research and careful timing are critical to
trend selection and theme development.
Recognizing a trend’s points of inflection is a useful indicator when trying to identify the
best possible moments for investments. Signals of inflection points are often characterized
by the emergence of new market players offering better products, more decentralized
business models, or lower costs.
Another indicator that a market is ripe for growth is when incumbent players are investing
heavily in R&D for new products and technologies, launching new products, or forming
alliances for new ventures with other firms.
Moreover, public awareness can also be a significant factor that can dramatically change
the course of trend development. For example, solar cells have been a viable technology
for decades, but their use as a commercial alternative to petroleum only gained powerful
momentum when consumers became sensitized to climate change, and public opinion on
fossil fuels soured.

Understanding emerging market dynamics

Given their growing populations and a rapidly expanding middle class, emerging markets
have become a key barometer for gauging how market trends will merge with sustainability
challenges and solutions. Trends forming in developed markets are likely to accelerate in
emerging economies, while sustainability challenges are likely to exacerbate. Yet, because
these economies are less developed, growth patterns will follow a different trajectory than
in developed markets.
In business, the playing field is usually more leveled – incumbents are fewer, barriers to
entry are lower, and interests are less entrenched. This gives new technologies and new
business models the opportunity to flourish and grow. Moreover, emerging economies can
effectively start afresh, building new and better-designed infrastructure, and designing
news laws and mandates with resource efficiency and sustainability in mind.
China’s role in the EV market is illustrative. Rapid growth and urbanization have intensified
many sustainability challenges, such as air pollution, carbon emissions, and traffic
congestion. EVs have been a cost-effective solution to address all three. Government
subsidies (coupled with a less-developed automotive market) have allowed the EV market
in China to flourish. They are now the default option for many first-time car owners in
19. Sheng, W. “China’s Manufacturers and market
China’s middle class. Moreover, municipal mandates for EVs in public transportation have take the lead to embrace green vehicles.”
helped lower urban smog and control traffic congestion.19 (2019, July). Global Times (China).
Figure 20: The seismic nature of trends – trends move in waves that impact business and society
Cross-sector currents
Converting to a circular economy
Electrification Transitioning to a Renewable energies

low-carbon economy
Digitization
Telemedicine Extending life expectancy,
Machine
M achin
ch e learning,
l arrn ngg artificial
art Intelligence quality of life and well-being Cloud/edge computing
Technology
e n logy Advances in energy storage
A Decentralized
utility grids Responsible consumption Rising healthcare costs
The platform economy and production
Demographics
emograph
r h cs Urbanization Circular systems Chronic disease
Healthy
Aging populations lifestyles Protecting and preserving
Resource scarcity
biodiversity and ecosystems
Rise of incomes in
Globalization emerging markets Water stress
Additive
Increased industrialization manufacturing
Eliminating climate change
Geopolitical power shifts/ Building resilient nations,

global trade Software cities and communities
simulation/
Environment Regulatory actions/ computer
Waste management
global governance aided design
& recycling
Global forces, constantly evolving Medium and longer term (3 year-more than a decade) The next half century
Megatrends Cross-sector disruptions Effects on structural trends Future scenarios
Source: RobecoSAM, EY (2020)

Assessing how trend dynamics affect sector fundamentals

Preserving the earth, sociodemographic shifts, and transformative technologies have
created a triumvirate of megatrends that will inevitably impact most areas of business and
society. However, their reach will vary from one sector to another. For this reason, rigorous
analysis is needed to assess the impact on specific industries and the attractive growth
opportunities created in response.
Smart materials: transforming industrial manufacturing

Growing sociodemographic challenges such as population growth, urbanization, and
increasing consumption mean finite resources are being extracted at an alarming rate. For
a sustainable future, the resource regeneration ratio should be 1:1, meaning the earth is
able to ‘recover’ and reproduce 100% of what is consumed.
Current resource consumption rates, however, are nearly twice (or 1.75x) as much as the
planet’s annual regenerative capacity.20 Without intervention, the economic prosperity of 20. Global Footprint Network’s National Footprint
Accounts, The Circle Economy. (2019)
future generations is being jeopardized.
Trends in resource extraction and use have the largest ramifications for resource-intensive
sectors along the industrial processing and manufacturing value chains. These include
material sectors like petrochemicals and metals that provide production inputs. They
also include the industrial manufacturing sectors that refine and process inputs to create
outputs, which are used by industries to power modern cities and economies.
Resource constraints have spurred human ingenuity in creating an arsenal of innovative

solutions to reduce the consumption of resources and improve resource processing in
industrial manufacturing. Nanoengineering is being used to produce more from less,
Table 2: Small, fast and soft meets large, hard and heavy – the benefits of digitization across industrial manufacturing
Asset performance enhancement through data analytics High Medium Low
Resource Asset network value Robotics and

Throughput efficiency Asset reliability Digital workforce maximization cobotics
Chemicals
Petrochemicals
Refining
Pulp and paper
Steel
Source: McKinsey & Co. (September 2018)

creating materials with enhanced properties (e.g. strength, lightweight, flexibility) while
using fewer resources. For instance, lightweight carbon fibers are being used to replace
steel in vehicles and heavy machinery. They may be light, but the strongest carbon fibers
are ten times stronger than steel and are less energy-intensive to produce.
Innovation and ingenuity are also leading to transformational change in manufacturing

techniques. Leading companies in the mining, chemicals, steel, and pulp & paper
industries are applying new data sources and new digital technologies to boost throughput,
efficiency, reliability, and productivity. With the help of computer-aided design (CAD)
software, additive manufacturing techniques like 3D printing and ‘digital twins’ are being
used to optimize products well before they hit the assembly line – saving time, money, and
resources in the process.
Water: the source of health and wealth

Water scarcity is a critical sustainability challenge that has been exacerbated by population
growth, urbanization, and industrialization. Global water demand already exceeds supply.
There are currently two billion people living in areas of acute water stress.21 As populations 21. United Nations Water Facts, unwater.org
grow, more food must be produced including water-intensive varieties like beef, chicken,
and pork, as Western dietary standards are adopted worldwide. The daily food intake of
one person can use up to 5,000 liters of water.22 22. United Nation Water Facts, unwater.org, see
“water, food, and energy,” https://www.
unwater.org/water-facts/water-food-and-
In parallel, there is an upsurge in people moving from rural to urban centers, increasing energy/
demands on utilities that support life and industry. By 2030, 60% of the world’s population
will be in megacities, that are, by current standards, ill-equipped to cope.23 Aging infrastructures 23. The World’s Cities in 2018 Data Booklet, United
Nations (2018).
and stressed-out capacity are limiting the provision of safe drinking water, effective
sanitation services, and efficient waste management systems.
Figure 21: Investing flows into water infrastructure – water demand in emerging market economies is increasing with industrialization
Water spending and GPD per capita from 2010-2015
200
Switzerland
Japan
Water treatment spending per capita USD
160
Netherlands
France Opportunities
120 United Kingdom Singapore
United States – Advanced water
Finland
South Korea
Germany treatment
Saudi Arabia – Smart water solutions
Portugal Sweden
80 Israel (leak detection,
sensors, analytics)
Poland Taiwan
40 Spain Italy
China Brazil
Mexico Russia
India Indonesia
0
0 4,000 16,000 64,000
Nominal GDP per capita USD (logarithmic scale)
Source: The World Bank (the Global Water Market, 2018), RobecoSAM

Infrastructure improvements are needed not only to support health and sanitation but
also to support manufacturing and industrial processing. Industry is the second largest
consumer of water in both developed and emerging economies. In light of this, countries in
emerging markets on every continent have embarked on massive infrastructure programs.
Sustainability experts believe water resources will be a critical part of China’s upcoming
14th Five-Year Plan (2021-2025).24 24. Neuweg, I. and Stern, N., May 2019. “China’s
14th Plan, sustainable development and the
new era”. Centre for Climate Change Economics
In developed markets, changes are also under way. Local municipalities are imposing and Policy.
stricter regulations on water quality. At the same time, however, water demand from
healthcare and biopharmaceutical sectors is increasing. Both trends provide supportive
end markets for sophisticated water analytics that guarantee quality and purity. Broad
demographic trends like globalization and urbanization are also converging with more
focused cross-sector trends, to create robust growth themes related to efficient water use,
water quality, water distribution, and wastewater treatment.
This, in turn, creates investment opportunities across a wide range of activities, including
irrigation systems and treatment chemicals within agriculture, as well as the provision
of safe drinking water and waste management services for public utilities and private
industries. In addition, the growth of water-intensive industries, like pharmaceuticals,
biotech and healthcare, are providing high-value growth channels in the areas of high-
precision water testing and analytics.
Trend bundling to derive robust investment themes

Understanding the dynamics between long-term trends facilitates the recognition and
bundling of trends with a common root cause and/or that can benefit from a shared solution.
Seizing threads and weaving bundles

Powerful investment themes are like steel threads in a robust cable: they are formed by
bundling robust, individual – but related – trends that are mutually reinforcing. Separate
but related trends are usually correlated and complementary – the evolution of one impacts
the evolution of the other, and their trajectories tend to move in parallel or in tandem.
Both sustainable and unsustainable trends exhibit complementary characteristics. A

negative trend is often exacerbated by other negative trends, while positive trends tend
to reinforce and amplify one another. Recognizing complementary and correlated trends
playing out across sectors, regions, and demographics provides insights into the root
causes of a challenge, as well as its scope and magnitude, its potential evolution, and the
appropriate solutions that apply.
Recognizing and linking related demographic trends

One example of a sociodemographic variable that is trending unsustainably is obesity.
Moreover, obesity is closely linked to chronic diseases such as diabetes and cardiovascular
disease, which are increasing worldwide in both developed and emerging markets. Obesity
does not just reduce life expectancy, life quality, and economic productivity – it also
contributes to higher healthcare costs.
Rising obesity is in turn influenced by complementary sociodemographic trends, like

urbanization. Economic development has contributed to a dramatic expansion of the

service sector, leading to a proliferation of sedentary ‘desk’ jobs. Urbanization has also led
to a greater emphasis on convenience across all aspects of life, from work, entertainment
and transportation, to food preparation and consumption.
At the same time, however, countertrends are emerging in other segments of society.
Millennials and Gen Zs favor healthier lifestyles, that include fitness, nutrition, mental
well-being, and work-life balance. Understanding that these trends are highly correlated
means they can be bundled together to facilitate the search for solutions that address
sustainability challenges.
Figure 22: Bundling trends to create robust investment themes and growth opportunities
DEMOGRAPHIC FUTURE GROWTH

– Obesity prevalence AREAS
– Rise in chronic disease
– Urbanization
– Emerging economy growth
Healthy eating &
– Dietary changes
nutrition
– Shifts in consumption patterns
– Rising healthcare costs
HEALTHY LIVING
Hygiene and
INVESTMENT STRATEGY
consumer health
TECHNOLOGY Main themes:
– Internet of Things (IoT), – Disease prevention
increase in connected devices – Early diagnosis
– Proliferation of mobile apps – Effective-efficient Chronic disease
for information sharing treatment management
– 5G and telecommunications
infrastructure
Fitness & active
lifestyles
REGULATORY
– Nutrional labeling
– Sugar content reductions Integrated & efficient
– Trans-fatty acid reductions healthcare delivery
Source:RobecoSAM
Recognizing sustainable solutions for multiple challenges

Any sustainable solution that seeks to address the causes and extreme costs of obesity
(and many other chronic diseases) will need to include prevention, early diagnostics, and
intervention. Effective strategies must include physical activity and improved nutrition, the
hallmarks of healthy lifestyles. Companies that provide products and services that support
healthy living will find strong demand across a large and diversified consumer base.
Recognizing supporting technologies that build scale and increase value

Technology is also included in trend bundles, as it often plays a key role in promoting trends
and ensuring that effective solutions are adopted. Digitalization and the IoT have also entered
lifestyle and health markets. Mobile phones and apps provide tools for healthy users to stay fit,
eat right, and stay motivated. Combined with sensors and connected devices, they also provide
cost-effective tools to monitor and share health data in lieu of more expensive hospital visits.

Technology trends like these can be bundled with other sociodemographic trends to further
strengthen prevention and healthy-living investment themes. More than half of the global
population resides in emerging countries where healthcare infrastructure is inadequate for
managing chronic diseases or maintaining preventative lifestyles. Yet, while fixed health
infrastructure is lacking, telecommunications infrastructure in these countries is rapidly
expanding, making it possible for people to access the same tech-based health solutions
that are available within developed markets.
Continuous trend review

In a rapidly changing world, the relevance of specific themes can increase or decline over
time, leading to the emergence of new investment opportunities and the disappearance of
others.
For example, the smart energy theme is increasingly less focused on energy generation
and more on how to efficiently manage energy flows throughout economic sectors. The
shift is the result of cross-sector secular trends like the electrification of the automotive
industry, and more broadly, the transportation sector. Furthermore, both electrification
and digitalization trends are changing energy demand and consumption patterns within Figure 23: The 17 UN SDGs
infrastructure and the built environment.
Changes are enabling the decentralization of utilities but will also have more sweeping
effects. As big data and cloud computing rise, electricity demand and heat generation will
soar. Thermal management of building systems, datacenters, and even the semiconductor
technologies that enable rapid computer processing, will need to keep up in order to meet
increased demand while remaining energy efficient.
These shifts are changing the dominant players in the energy value chain and are creating
new challenges and new areas of growth and investment. Trend streams and cross-currents
are constantly changing, so trend analysis and theme development should not be a one-off
process. It should be part of an ongoing journey of continuous monitoring and evaluation
to identify areas of secular growth and to ensure thematic investment strategies are well
positioned to benefit.
Complementary trends – SDGs and sustainable investment themes

The UN Sustainable Development Goals (SDGs) are a comprehensive set of 17 global
challenges that must be addressed to help ensure a universally safe, healthy, and
prosperous future. The goals span a broad range of issues relevant to both developing
and developed populations, including improving health and education, combating
climate change and environmental pollution, enhancing diversity, reducing inequalities
and building resilient cities, communities, infrastructures, and institutions.
The SDGs and sustainable thematic funds both share a common vision and commitment
to overcoming challenges that reduce the potential of capital and lead to suboptimal
outcomes. In this way, they can be characterized as complementary and mutually
reinforcing trends – investment in one contributes to the success of the other. Sustainable
thematic funds support the SDGs by allocating capital to firms that are actively working to
create solutions for sustainability challenges and that are directly contributing to achieving
SDG targets. Source: United Nations

Sustainability challenges are too big, too complex, and too expensive for the public sector
alone. Effective action and solutions need the innovation, know-how and financing of
companies in the private sector. But private sector intervention shouldn’t be construed as
charitable giving. The SDGs represent a multi-trillion dollar opportunity for committed and
enterprising firms looking to develop innovative solutions and effective business models to
distribute sustainable products and services.
With so much value at stake, it is no surprise to discover corporate interest in SDGs is

intensifying. Since their launch in 2015, more than 15,000 organizations, including 9,500
companies representing every economic sector and geographic region, have committed to
supporting and achieving the SDGs.
Sustainable investment portfolios benefit directly from greater awareness and support from
companies, regulators, governments, consumers, and other stakeholders. The strong waves
created by the SDG mindset taking hold in public and private sectors will make investment
themes that have a head start in addressing sustainability challenges even more effective.

5
I D E N T I F Y I N G
S T R U C T U R A L
W I N N E R S
STOCK SELECTION
Fundamental analysis, aided by state-of-the-art screening tools,

such as relative valuation, momentum, or earnings revisions,
remains the main workhorse for stock selection. It is beyond Apart from Tesla, which
the scope of this publication, however, to delve into the art of other US carmaker never
went bankrupt?
fundamental analysis. Many textbooks do a much better job than
we ever could. Instead, we highlight a few models that are not A. Chrysler
B. Ford
part of the standard toolkit, but can nevertheless shed light on this C. GM
matter; especially in the context of a trends or thematic approach.
regards to independent listed carmakers.
already went bankrupt, this is at least true with
never went bankrupt. Since both Chrysler and GM
and Tesla are the only two US carmakers that
Answer: According to Elon Musk, Tesla’s CEO, Ford
The company life cycle

One model that we find very useful when thinking about change and how it affects
companies and industries over time, is the company life-cycle model.1 Figure 24 categorizes 1. This concept was developed by Bartley Madden
in “The CFROI Life Cycle”. Bartley J. Madden. The
businesses into four groups, reflecting the life stages all people, businesses and industries
Journal of Investing, Summer 1996, 5 (2) 10-20
go through – namely birth, growth, maturity, and decline. These groups emerge on the
basis of answers to the following two questions:
– Is the business’s cash flow return on investment (CFROI) higher or lower than its cost of
capital (real discount rate or DR)?
– Is the business investing heavily or moderately in future growth?
Figure 24: Stylized company life cycle
Question marks Stars Cash cows Dogs

CFROI<DR CFROI>DR CFROI>DR CFROI<DR
High growth High growth Low growth Low growth
CFROI (return on investment) Reinvestment rate Discount rate (cost of capital)
Uncertain future CFROI trajectory
Source: Credit Suisse HOLT

STOCK SELECTION
The combination of different answers yields four categories: question marks, stars, cash
cows and dogs. These categories correspond to those highlighted in the BCG growth-
share matrix, developed by the Boston Consulting Group in the 1970s. The matrix plots a
company’s products and services in a four-square matrix. The y-axis represents the rate of
market growth and the x-axis represents market share. To adjust the matrix to the company
life-cycle model, we need to substitute reinvestment for market growth on the y-axis and
profitability for market share on the x-axis, as shown in Figure 25.
Figure 25: BCG matrix amended to reflect the company life-cycle model
High Question marks – ‘Birth’ Stars – ‘Growth’

The combination of high investment and an When high investments are coupled with investment
investment return that is below the cost of capital is returns that are in excess of the cost of capital,
referred to as ‘question marks’. The business is still a business creates rapidly increasing economic
generating negative economic value, but is investing heavily in value. From a business perspective, this is the sweet spot, hence
future economic success. However, the result is uncertain. Some the designation of ‘stars’ for this phase. The businesses in this
businesses succeed, others fail. category are usually relatively young companies that have proven
their economic worth and can still make significant investments in
Reinvestment
new growth opportunities.
Dogs – ‘Decline’ Cash cows – ‘Maturity’

Given enough time, every business enters a period of lf businesses are still creating economic value,
stagnation or even decline as the markets it serves but have fewer opportunities to make profitable
become saturated. Products that for decades sold investments, they are referred to as ‘cash cows’.
like hot cakes now often prove difficult to shift and recovering the As the company’s profits are no longer being used for new
costs of capital is usually a struggle. lt’s a dog ‘s life. The common investments, it produces excess cash that can be paid to the
denominator for many businesses in this life stage is that they shareholders. This category includes companies that have often
are active in industries that are losing or have already lost their been operating for decades and, as a result, are having to deal
economic relevance in the current information age. with saturating markets.
Low
Low Profitability High
Source: Robeco Trends Investing
A stylized framework – not a fixed trajectory that every company passes through
The BCG matrix is, of course, a stylized representation of the business life cycle. Not all
businesses go through each stage and not necessarily in that sequence. Relatively few
companies will follow the exact trajectory projected by the life-cycle framework. The
competitive landscape is often too tough and too dynamic for that. Nevertheless, distilling
a complex reality into a simple matrix can help with investment decisions.
Sooner or later, businesses that create economic value are rewarded, while those that
destroy economic value suffer the consequences. From an investor’s perspective, question
marks and dogs are, in theory, the riskiest categories. Stars and cash cows tend to be a
safer bet. Table 3 describes some common stock characteristics of question marks, stars,
cash cows and dogs (QSCD), depending on a company’s life-cycle stage.

STOCK SELECTION
Table 3: Common stock characteristics of QSCD
Question marks Stars Cash cows Dogs
Strategic situation Prove economic viability Develop market – invest Harvesting mode – invest Struggling to survive –
– invest to establish to maximize growth to maintain or extend strategic initiatives needed
market foothold and buiId opportunity and future competitive advantage(s) to escape an eventual but
competitive advantage(s) economic profit generation and maximize free cash flow inevitable collapse of the
business
Returns spread Negative – improving Positive – rising Positive – declining Flat – negative
Reinvestment rate Rising Peaking Declining Maintenance at best
Free cash flow Negative Negative/low Positive/high Erratic

Valuation Largely reflects expected Value of assets-in-place Value of assets-in-place Largely reflects value of
future value creation – high < future value creation – > future value creation – assets-in-place – multiples
multiples of existing P&L multiples generally higher multiples generally around generally below market
line items than market average market average average
Source: Robeco Trends Investing
How does the company life cycle tie in with a trends and thematic
investing approach?
The question marks and stars categories represent the most fertile hunting grounds for
early stage exposure to high-growth, monetizable trends and themes. Question marks
might have a few potential future winners, but the odds of finding these are rather slim.2 2. Holland, D. A. and Matthews, B. A., 2017.
“Beyond Earnings: Applying the HOLT CFROI®
This is also the category that contains most of the hypes and bubbles, making it a high-risk
and economic profit framework”, Wiley. The
investment category. It is therefore preferable that only a relatively small part of a trends or authors find that approximately one in eight
thematic portfolio be allocated to this category. companies manages to transition from question
marks to stars.
Stars consist primarily of proven winners that still have ample opportunity to invest in
profitable projects, thus compounding profits at the highest rate. They therefore typically
account for a large part of a trends or thematic portfolio. The risk in this category is usually
that investors’ expectations can easily overshoot, leading to sudden price corrections when
high expectations are not met.
Cash cows generally do not meet the high growth criteria, but are the least risky category.
It often makes sense from a risk management perspective to allocate a sizeable portion of
a trends or thematic portfolio to this category, provided there is sufficient exposure to the
identified trend or theme.
Dogs can sometimes reinvent themselves and become stars, but this is rare.3 While dogs 3. Looking at five-year periods, Holland and
Matthews, ibid., find that only about 7% of
can represent short-term, tactical investment opportunities, this category should be
stocks in the dogs category are able to transition
structurally avoided. to the stars category.
Practical use cases for the QSCD framework

The bottom-up classification of individual companies, as either question marks, stars, cash
cows or dogs, provides an essential reality check and feedback mechanism for the top-down
identification of trends or themes. It answers questions regarding:

STOCK SELECTION
– The timing of trends and themes. The proportion of question marks, stars, cash cows or
dogs within a given trend or theme’s investable universe tells us a lot about the relative FUN QUIZ | WHO SAID:
maturity of that trend or theme, and about how it could evolve over time.
– The scope of the market opportunity. The aggregate market capitalization of businesses ‘There’s no chance that
benefiting from a particular trend or theme, is a useful indicator of the relative scope of the iPhone is going to get
the relevant universe and corresponding investment opportunity. any significant market
– The portfolio composition. The QSCD framework helps determine whether strategies share. No chance.’
are logically and prudently positioned across question marks, stars, cash cows and dogs.
– The monetization potential of trends and themes. Trends or themes may appear A. Steve Ballmer
attractive from a top-down perspective, but if the accompanying investment universe B. Paris Hilton
has lots of question marks and dogs, monetization potential may (still) be insufficiently C. Jack Welsh
attractive for investment.
– The distribution of attractive investment opportunities. Sometimes, there is a large
discrepancy between the equal or market-weighted statistics of a group of companies 29 April 2007.
across a universe and the relative attractiveness of companies across a business value
Microsoft’s Ballmer having a ‘great time‘
newspaper USA Today. Lieberman, D., ‘CEO Forum:
chain. The company life-cycle lens can help investors zoom in on attractive investment Answer: Steve Ballmer, in an interview with
opportunities with greater accuracy.
All in all, the QSCD framework can be said to serve as a useful and dynamic guide in helping
trends and thematic investors navigate the continuously changing business environment.
Circumventing market efficiency: incorporating long-term information

and non-linear change
The market’s assessment of future growth opportunities is, at any point in time, reflected
in a stock’s valuation and continually adjusted as the future unfolds. Outperforming
the market therefore depends on finding windows of opportunity where the market
temporarily overlooks growth prospects. As any practitioner can attest to, that is a tall
order. However, it is not impossible. There are two types of situations4 in which the market 4. As discussed more extensively in our white
paper “The Rationale for Trends Investing”,
is relatively slow to react:
Robeco Trends Investing, 2017, trends and
thematic strategies are underreaction or
– Long-term trends that are relatively predictable in a statistical sense. For instance, momentum strategies. There is another broad
class of events in which markets show an
Stefano DellaVigna and Joshua Pollet5 find markets interpret long-term demographic opposite tendency to overreact: hypes, bubbles
information inaccurately when pricing forecastable demand changes for age-sensitive and temporary overextrapolations of salient
but typically transitory events. Value strategies
sectors, such as toys, bicycles, beer, life insurance and nursing homes. are designed to deal with these temporary
– Non-linear change. In the 1970s, William Wagenaar and Sabato Sagaria6 conducted mispricings and benefit from them.
several experiments, using an intuitive extrapolation exercise that showed exponential 5. DellaVigna, S. and Pollet, J., 2007.
growth in numerical series and graphs was grossly underestimated. The extrapolations “Demographics and Industry Returns”,
American Economic Review.
did not improve through daily experience with growth processes or when additional
explanations regarding the nature of exponential growth were given, suggesting the 6. Wagenaar, W. A. and Sagaria, S.D., 1975.
human brain is not equipped to deal with non-linear change processes. “Misperception of exponential growth”,
Perception & Psychophysics.

STOCK SELECTION
WHY DO THESE GROWTH STOCKS ALWAYS SEEM IMPOSSIBLY EXPENSIVE? 7

Many investors find it difficult to invest in stocks of high-quality future. Therefore, they typically trade at much higher multiples
and high-growth companies because they usually trade at than companies that lack these characteristics.
multiples8 that are – sometimes much – higher than that of
the market. Implicitly, these investors assume there is some The justified multiple as a function of the company life cycle
reasonable range of multiples at which most, or all, companies There is an obvious link between a company’s life-cycle stage
should trade relative to the market. Usually, this notion of and the multiple it should trade at. Young companies that have
‘reasonable’ is based on a historical average or a peer group of a long runway of future value creation ahead of them deserve
similar companies. to trade at much higher multiples than older, larger and more
established companies. The latter make up the bulk of the
Multiples, however, have become a shorthand for the equity market but have fewer or no growth opportunities
valuation process. Importantly, multiples obscure the value relative to their existing assets.
drivers that really matter. It is the value drivers that determine
the reasonableness of the multiple, not the multiple that Figure 26 shows the theoretical multiple trajectory of a fictitious
determines the reasonableness of the valuation. More company that starts out with a positive spread of 25% over its 8%
specifically, the market value of a company and its associated cost of capital. The spread is assumed to erode by 1% every year, so
valuation multiple can be broken down into two main parts: that the firm’s competitive advantage will last 25 years. Assuming
perfect prescience, investors should be willing to pay a seemingly
1. The steady-state value assumes that the current assets astronomical P/E multiple of 96.9 at the start of this company’s life.
in place, properly maintained, will produce a level of
normalized profits indefinitely into the future. This steady This high multiple is warranted, however, by the prospect of
stream of future profits can be valued as a perpetuity – in 25 years of profitable, value-creating growth. As the company
other words, the normalized profit divided by the cost of matures over time and steadily realizes its growth opportunities,
capital. Therefore, the appropriate multiple to determine the justifiable valuation multiple will slowly converge towards
what should be paid for the steady-state value of a business the steady-state P/E multiple of 12.5 (1/8% after 25 years),
is the reciprocal of the cost of capital. So, if the cost of reflecting the shrinking prospects for future profitable growth.
capital is 8%, the steady-state price/earnings (P/E) multiple
is 12.5 (1/8%). 7 . For an in-depth discussion of what drives multiples and in which
circumstances paying a high multiple is justified, see the white paper “When
2. Future value creation is driven by three fundamental paying a high multiple makes sense”, Robeco Trends Investing, February 2017.
factors. First, the spread between returns on incremental 8. There are many kinds of multiples, of course. Here, we implicitly use the price-
earnings multiple.
invested capital and the cost of capital. Second, the relative
size of profitable investment opportunities. Third, the
duration of competitive advantage.
Figure 26: The justified P/E multiple with perfect foresight
The steady-state value is the straightforward function of 120

prevailing risk-free capital market rates and the equity risk 96.9
premium, which itself depends on aggregate investor risk 100
appetite at a given point in time. The steady-state value of a 80 66.5
company can vary a lot over time, as both capital market rates
Multiple
and investor risk appetite fluctuate. However, this does not 60

42.9
cause divergence in multiples across companies. 40 26.0
15.9
12.5
Differences in multiples across companies are determined 20
by differences in expected future value creation. Companies 0

that earn high returns on future investments generally have 0 5 10 15 20 25 30
Period
profitable investment opportunities and can be expected to
maintain their competitive advantage for the foreseeable Source: Robeco Trends Investing

STOCK SELECTION
Tools and models to benefit from underappreciation of long-term

information
One of the challenges for growth-oriented investment approaches such as trends and
thematic strategies is that growth – whether measured as growth in revenues, earnings or
assets – tends to mean revert rather quickly.9 As the base against which growth is measured 9. Koller, Goedhart, Wessels, “Valuation –
Measuring and Managing the Value of
gets bigger, it becomes increasingly difficult to maintain high growth rates, while market
Companies”, Fourth edition, Wiley 2005, for
saturation and increasing competition weigh heavier on growth as time goes by. instance, find that growth rate differentials
typically tend to largely dissipate in five years.
Other studies generally come to similar
Because high historical growth rates of revenues or earnings tend to fade over time, these conclusions.
numbers are not sufficiently reliable to base an investment strategy on. Only in exceptional
cases, such as demographically driven changes in age-sensitive sectors, for example, may it
be possible to benefit from predictive, long-term statistical information.
ROIC10: an underutilized source of long-term information 10. ROIC stands for return on invested capital.
ROIC contains useful, long-term information that markets tend to underappreciate, but
that provides an opportunity for exploitation. It is well documented that relative returns on
invested capital, while showing a distinct tendency to revert to the mean, tend to persist
for much longer than most financial analysts anticipate and which the market discounts.11 11. The white paper “Trends, Industries and the
Quest for Alpha”, Robeco Trends Investing,
Figure 27 shows that the rank order of relative returns remains intact even after 15 years.
2019, demonstrates, for instance, that by using
a simple strategy of investing in high returns
and avoiding low returns, industries would
have significantly outperformed the market
Figure 27: ROIC Decay Analysis: non-financial companies over longer time frames.
Median ROIC of portfolio* ROIC

(percent)
35
30
25
20
Percent
15 >20
15-20
10 10-15
5-10
5 <5
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Number of years following portfolio formation
ROIC 1st (highest) quintile ROIC 2nd quintile ROIC 3rd quintile
ROIC 4th quintile ROIC 5th (lowest) quintile
* At year 0, companies are grouped into one of five portfolios, based on ROIC.
Source: Koller, Goedhart, Wessels, “Valuation – Measuring and Managing the Value of Companies”, Fourth edition,
Wiley 2005, Chapter 6.
This is partly due to the fact that most financial analysts use a 10-year horizon, at most, to
predict above-average returns. They assume returns start to veer towards or equal the cost
of capital thereafter. This has important implications for corporate valuation. Determining
a continuing value on the premise that ROIC will converge towards the weighted average
cost of capital (WACC) is overly conservative for companies generating high ROICs, which in
turn creates opportunities for horizon arbitrage.

STOCK SELECTION
Industry is the most important driver of differences in returns on invested capital 12. In “The strategic yardstick you can’t afford to
ignore”, Mc Kinsey on Finance, Number 49, Winter
Company returns on invested capital are primarily determined by industry economics.12
2014, Bradley, Dawson and Smit report that 40%
Moreover, industry ranking of returns do not vary materially over time.13 This means of a company’s profit depends on the industry in
industry returns can be very useful in providing information about likely future returns which it operates, while the remaining 60% can be
attributed to company-specific factors.
of individual companies. This, combined with the tendency to underutilize long-term 13. See, for instance, Koller, Goedhart, Wessels,
information, adds up to an exploitable market inefficiency.14 “Valuation – Measuring and Managing the Value of
Companies”, chapter 6.
14. A simple strategy of buying a basket of the top
quintile profitable industries in 2007, shorting the
bottom quintile and holding on for ten years, would
have produced 11.7% annualized excess return relative
to the MSCI ACWI index.
COVID-19 AND THE GREAT ACCELERATION

The Covid-19 pandemic of 2020 has reinforced and even to invest in. Factoring in relative industry profitability
widened the gap between the best and worst performing significantly improves the odds of beating the market in the
industries, according to a recent study by McKinsey. This long term. This is why we believe relative industry profitability
illustrates how important it is to choose the right industries deserves a place in every trends investor’s toolkit.
Figure 28: The best industries are getting better, and the worst are getting worse
Average economic profit by industry, USD billion (n = 2,562)1 Total change

Semiconductors
Pharmaceuticals Top 6 industries
+275
Personal products
Software
Technology hardware
Media
Telecommunication
Healthcare equipment Middle industries
11
Consumer durables/apparel
Consumer services
Food/beverage/tobacco
Retailing
Professional services
Food retailing
Automobiles
Materials
Transportation
Capital goods
Insurance Bottom 6 industries
-373
Banks
Diversified financial
Utilities
Energy
-1,500 -1,000 -500 0 500 1,000 1,500 2,000 2,500 3,000
Long term, 2020-market-valuation implied 2018
1. Largest non-financial companies by revenue in 2018 with data for 2003-2018 available.
Source: Bradley, C., Hirt, M., Hudson, S., Northcote, N. and Smit, S., July 2020. “The Great Acceleration”, McKinsey Insights.

STOCK SELECTION
Figure 29 illustrates this point well. It depicts the relative profitability of industries and
how this evolved over time, in the period 2007-2017.15 Most industries tend to experience 15. “Trends, industries and the quest for outperformance”,
Robeco Trends Investing, January 2019.
fairly consistent relative economic performance over time, with a minority of industries
experiencing either a significant improvement or a significant deterioration in relative
profitability. The message is clear: winning industries tend to remain winners, whereas
losing industries tend to remain stuck in the mud.
Broad secular trends in technology improvements, sociodemographics and societal

institutions tend to stay in place for decades and largely determine the relative profitability
across industries. These differences in profitability generally remain relatively stable over
time. However, changes in relative profitability do occasionally happen, and are driven
either by outsized fluctuations of the business cycle or the emergence of new trends.
Figure 29: Relative industry profitability and its stickiness over time
Relative profitability improvement Persistently high relative profitability

100% Tobacco
IT services
Household products
Professional services
Internet software & services
Personal products
Life sciences tools & services
Software
Beverages
Biotechnology
Health care equipment & supplies
Health care providers & services
Internet and direct marketing retail
Diversified consumer services
Consumer finance
Health care technology
Thrifts & mortgage finance
Textiles, apparel & luxury Goods
Media y=0.65x +0.17
Semiconductors & semiconductor equipment
Technology hardware, storage & peripherals R2=0.43
Aerospace & defense
Pharmaceuticals
capital markets
Mortgage real estate investments trusts
Food products
Communications equipment
Percentile score 2017
Specialty retail
Commercial services & ssupplies
Distributors
Electrical Equipment
Hotels, restaurants & leisure
Air freight & logistics
Household durables
50% Machinery
Leisure products
Building products
Diversified financial services
electronic equipment, Instruments & components
Containers & packaging
Auto components
Food & staples retailing
Chemicals
Industrial conglomerates
Insurance
Multiline retail
Automobiles
Water utilities
Wireless telecommunication Services
Road & rail
transportation infrastructure Trading companies & distributors
Construction materials
Airlines
Construction & engineering
Banks
Gas utilities
Diversified telecommunication services
Metals & mining
Multi-utilities
Real estate management & development
Equity real estate investments trusts
Paper & forest products
Electric utilities
Oil, gas & consumable Fuels
Independent power & renewable electricity producers
Marine
Energy equipment & services
0%
0% Persistently low relative profitability 50% Relative profitability deterioration 100%
Percentile score 2007
Source: Robeco Trends Investing based on Crédit Suisse HOLT data
Disruptive change and the business model lens

Most of the time, things stay the same or change only incrementally. Sometimes, however,
they change suddenly and explosively. In business, such sudden shifts are often described as
‘disruptive’, as they tend to destroy the traditional ways of doing things while creating a new
way of doing things. Disruptive change doesn’t evolve linearly. Instead, it typically follows a
non-linear path, often expressed as an S-curve.

STOCK SELECTION
The human brain struggles to grasp the reach of non-linear change. We therefore
considerably underestimate the consequences of such changes (such as exponential growth,
for instance) and, in particular, their effect over longer time frames. The outcome of
compounding long-term growth will therefore never cease to amaze us. It is also why non- 16. Christensen, Clayton M.; “The Innovator’s
Dilemma: When New Technologies Cause Great
linear change can be a potential source of long-term alpha for investors.
Firms to Fail”. Boston, MA: Harvard Business School
Press, 1997.
Clayton Christensen, the late Harvard innovation guru, coined the term ‘disruptive
17. In fact, they are often inferior to existing
innovation’ and built groundbreaking theories around it.16 Disruption is often attributed technologies in their first iteration.
to the emergence of superior, new technologies that render older technologies obsolete.
However, as Christensen pointed out, in most cases it isn’t the superiority of new 18. See our 2016 white paper “Business model disruption
- digitization and connectivity drive ground-shifting
technologies17 that is disruptive, but that these technologies facilitate the emergence of new business models”, Robeco Trends Investing, for
new business models,18 which completely change the competitive landscape. an in-depth discussion of this topic.
HOW AIRBNB DISRUPTED THE LODGING INDUSTRY – BUSINESS MODEL INNOVATION IN ACTION
Few industries were thought to be as immune to potential Enter Airbnb in the late 2000s. By simply providing an online
disruption as the lodging industry. Location and sufficient platform that connected private lodging suppliers with
scale had always been key to thriving in the face of those looking for lodging space, Airbnb and the likes vastly
competition. Good, available locations were scarce and increased the potential lodging supply. Traditional suppliers,
finding new locations was difficult. If a business had a good such as hotels and B&Bs, suddenly had to contend with this
location with sufficient supply to absorb local demand, the increased base of suppliers, especially during times of peak
local competitive landscape remained stable. demand – previously the most lucrative periods.
Figure 30: A visual impression of Airbnb’s disruption of the lodging industry
Conventional lodging in Amsterdam Airbnb listings in Amsterdam
Source: OSCity.eu, Google Maps

STOCK SELECTION
Generic business models and how they relate to the stages of

economic development
Business models come in many different guises, with different value propositions and
monetization schemes. This can make it difficult to see the forest for the trees. Fortunately,
all business models have an underlying structure or logic to their value creation process,
and can be categorized according to this.19 From this perspective, three main groups 19. This categorization is based on Stabell and Fjeldstad;
“Configuring Value for Competitive Advantage: on
emerge: the value chain, the value shop, and the value network.
Chains, Shops and Networks”; Strategic Management
Journal, Vol.19 (1998).
– The value chain. The value proposition of firms employing a value chain business
configuration is to produce a highly standardized product or service that satisfies
common customer needs. The capabilities needed to deliver on this value proposition
revolve around inbound logistics, operations, outbound logistics, marketing and
services. Monetization comes from the price the customer pays for the product or service
that the firm delivers. Value chain business models typically dominate in industrial
economies.
– The value shop. Firms employing a value shop business configuration create value by
finding a solution to a specific customer problem or by creating intellectual property.
The capabilities needed to deliver on this value proposition revolve around expert
knowledge, problem analysis, problem solving, choice, (project) execution, as well as
control and evaluation. Monetization comes from the fee the customer pays for the
service, or from the license fee that is charged for using the intellectual property. Value
shop business models are a typical product of service economies.
– The value network. Firms employing a value network business configuration create
value by linking firms or people that need or want to interact economically or socially.
The capabilities needed to deliver on this value proposition revolve around network
promotion, contract management, service provisioning and infrastructure operation.
Monetization takes the form of an access fee, which is the price the network member
pays for the opportunity to interact with other network members. Value network
business models typically thrive in digital economies.
Table 4 summarizes and provides examples of these generic business models, based on the
work of Barry Libert, Megan Beck and Jerry Wind, in collaboration with Deloitte.20 20. See B. Libert, M. Beck and J. Wind “The Network
Imperative: How to Survive and Grow in the Age of
Digital Business Models”, Harvard Business Review
The most relevant takeaway for investors is that within markets there is a clear hierarchy Press, 2016.
of multiples of revenue for the different business model classes. On average, investors pay
twice as much for service-oriented value shops than for value chains, four times as much
for intellectual property value shops, and eight times as much for value networks.21 Also, 21. These multiples have moved up in recent years as
market valuations have increased, mainly under
investors pay two to four times as much for businesses that operate beyond the ‘digital
the influence of very low interest rates. The relative
divide’, the demarcation line between decreasing and increasing returns to scale.22 differences between these classes have broadly
remained the same.
As economic value creation shifts from tangible to intangible and from analogue to digital 22. The authors have dubbed value chains “asset
assets, there is an inexorable pull towards intellectual property (IP) and network-based builders”, service-oriented value shops “service
providers”, IP value shops “technology creators” and
business models. As seen recently, the adoption of network-based business models by value networks “network orchestrators”.
companies such as Uber, Airbnb or Grubhub has created huge disruptive potential for
traditional businesses in the transportation, lodging or restaurant sectors. Trends and
thematic investors who ignore the business model lens, do so at their own peril.

STOCK SELECTION
Table 4: Main features of different business models
Business model Tagline Description Unit of monetization Examples Revenue multiple
Value chain – making Make one, sell one Use capital to make, Products – Manufacturing
1x
physical products, market, distribute and – Packaging
asset building sell physical products – MetaIs production
– Chemicals production
– Shipbuilding
Value shop – providing Hire one, sell one Use people who Billable time – Repair, inspection &
services, solving produce billable hours maintenance services
unique problems for which they charge
clients
– Consulting services
– Resource exploration
– Engineering & construction
2x
– Legal services
DIG ITA L DIVIDE
Value shop – creating Make one, sell many Use company resources lntellectual property: – Software code
technology, ideas or to develop and sell source code, patents, – Games
know-how, that can
be reproduced at low
marginal cost
intellectual property
(IP)
trademarks, copyrights
etc.
– Biotechnology
– PharmaceuticaIs
– Creative products (films,
4x
TV-series, books)
Value network Many make, market Use digital networks / Network size – Social networks
8x
facilitating and and sell to many platforms to connect (number and quality – S tock exchanges
orchestrating businesses and of participants/ –O nline market places
commercial or social potential clients with connections) – Credit card companies
interactions each other – C ar sharing companies
Source: B. Libert, M. Beck and J. Wind, Deloitte, Robeco Trends Investing
Curveballs – hype cycles and persistent (mis)perceptions

There are clear instances where investors get collectively carried away and temporarily
misprice groups of stocks, as several well-known bubbles and manias have shown.
Industries in the early stages of their life cycle are more susceptible to these temporary
mispricings than more mature industries. This is especially true when it comes to promising
new technologies that capture the imagination of investors.
It is easy to get sucked into these bouts of euphoria as stock prices shoot up to the moon,
but the risks are very high. The Gartner Hype Cycle is a useful tool when navigating these
tricky waters, but in general, it is best to stay clear of the hype phase.
Another curveball long-term investors need to be prepared for is persistent market

perceptions or misperceptions of certain stocks or groups of stocks. Although fundamentals
have started to diverge from prevailing views of market participants, only perceptive
observers will be aware of this and it might take a long time for these views to become
widely accepted. This is the potential downside of employing an underreaction strategy.
You might very well be right, but you might end up waiting a long time for the rest of the
market to catch on.

STOCK SELECTION
AMAZON: WHEN A PLAN COMES TOGETHER, EVENTUALLY

Finding a structural winner and holding on through good and Surviving the crisis and building its business model for the
bad times is very difficult, as rewards may only be reaped after digital age
many years. However, the analytical framework and the tools However, in contrast to many other internet startups, Amazon
presented in this publication make this search easier and help managed to get its business model right. By 2003, it had
investors to have the conviction to invest in these stocks and hold earned a higher ROIC than its cost of capital for the first time
on to them. Amazon’s case study provides a clear illustration of ever, placing it in the star category of its life cycle. It continued
the twists and turns involved in this quest for structural winners. to invest heavily, to the detriment of its short-term earnings.
This led to a perennially high P/E multiple and a persistent
Beginnings: a classic hype cycle consensus perception that Amazon was overvalued.
Amazon started out as an online bookseller in 1996 and
IPO’ed in 1997. Excitement about the ‘new economy’ was The stock was an uninspiring performer for most of the
running high and the stock was caught up in the frenzy of 2000s. At this time, most investors were focused on the
buying anything that had to do with the internet. It was a astonishing growth in emerging economies, and many were
classic hype cycle. Amazon, like so many internet startups, still mindful of the dot-com crash. Yet to the trained eye,
invested heavily in its future but did not yet have a proven, Amazon was launching a lot of promising business model
profitable business model – the hallmark of a question mark innovations. It had added a third-party market platform to its
company. Its stock cratered once the internet bubble was services, had come up with the Prime subscription and had
pierced, compounded by a lot of skepticism regarding the launched Amazon Web Services (AWS), boosting its fitness for
company itself. This was exemplified by nicknames such as the digital age.
Amazon.con, Amazon.bomb, Amazon.toast or Amazon.org
(the .org extension is reserved for non-profit organizations).
Figure 31: Amazon’s stock history and some salient events
6,000
4,000 2013 Gartner estimates
1999 that AWS is 5 times
2,000 Wildly inflated bigger than the next 14
expectations. contestants combined in
1,000 Time magazine cloud infrastructure 2020
600 names Jeff Congressional
400 Bezos ‘Person hearings: ‘big
of the year’ 2003-2009 Market’s perception: tech getting
Stock price in USD
200 perennially overvalued e-tailer too powerful’

1997-1999
‘New
economy’ 2010-2013 2015-2019
paradigm Market’s perception Incumbents’ stocks crater
gains changing: premier whenever Amazon enters
traction outsourced new markets. Afraid of
business service getting ‘Amazoned’
10 provider disguised
6.00 as online retailer
4.00
2001-2002
2.00 Disillusionment:
‘Amazon.bomb’
1.00
1997-1999 2000-2004 2005-2009 2010-2014 2015-2019

1997-2003 Question mark 2003-2020 Star
Source: Bloomberg, Robeco

STOCK SELECTION
Amazon.com in 1997 Amazon.com in 2020
Recognition and the rise to stardom As long as its considerable competitive advantages support
It wasn’t until the aftermath of the global financial crisis that returns higher than its cost of capital and as long as it finds
market perception gradually became more positive – not only enough sizeable investment opportunities, the company
with respect to Amazon, but in terms of the entire internet will remain in the star stage of its life cycle and continue to
industry. This was largely due to its significant growth, paired generate and compound profits at a high rate. There are
with high and sustainable returns on invested capital – which currently no indications that this dynamic is weakening.
was difficult to ignore. Nevertheless, Amazon only received What’s more, the company is active in attractive industries
widespread recognition as a growth company when it and has the right business model configuration for the digital
became clear how large and profitable its AWS business had age.
become, around 2015.
Life is never easy as an investor
Market perception then decisively shifted to being Of course, good business performance does not equate
predominantly positive. Amazon was increasingly seen as good stock performance. High expectations regarding
a formidable competitor that could disrupt any market it Amazon’s future value creation are embedded in its stock
entered – even to the point that stocks of incumbents in that price, and it will be increasingly difficult to beat those
market cratered, out of fear of being ‘Amazoned’. Amazon’s expectations. Its earnings may soar as the company matures
market capitalization has, at the time of writing, reached USD and its earlier investments start to bear fruit, but that will
1.6 trillion. In fact, concerns about its power and that of other be counterbalanced by a multiple contraction if market
internet giants have instigated congressional hearings about perceptions cast doubt on Amazon’s continued capacity to
possible abuses of that power. generate future value.
The end of an epic narrative?

So, will the company be forced to split up and will this herald the The information provided in this publication does not constitute a buy, sell or
end of Amazon’s epic narrative? Anything is possible of course, hold recommendation for any particular security. The information shown is only
available for illustrative purposes only. No representation is made that these
but the odds still heavily favor a continuation of Amazon’s examples are past or current recommendations, that they should be bought or
business success, even if the company is eventually broken up. sold, nor whether they were successful or not.

C O N C L U S I O N

CONCLUSION
Active management and trends and thematic investing: a perfect match

In a world characterized by accelerating socioeconomic shifts, trends and thematic
investing offers active investors a promising proposition aimed at achieving attractive
investment results over the long run.
Trends and thematic investing gives investors the opportunity to express their convictions with
respect to long-term developments. They are able to adopt more active positions relative to
market capitalization-weighted indices and to target high relative returns over time. Finally,
a trends and thematic investing approach ensures sustainability takes the center stage in
investors’ portfolios.
Trends and thematic investment products have enjoyed quite some popularity over the past few
years, which can largely be explained by their attractive narrative and – in some cases – good
short-term investment results. Yet, not all trends and thematic strategies are born equal. Some
offerings are clearly better than others. Just a good story is not enough.
To achieve consistent long-term outperformance, trends and thematic strategies need a

robust and transparent framework to identify and analyze relevant trends and themes so that
investors can capitalize on them. As this publication illustrates, this starts with identifying a
few megatrends, i.e. broad-based structural shifts in our socioeconomic environment, that
comprise subtrends, which are more focused and concrete manifestations of these forces of
change.
The next stage is about identifying the most attractive trends and themes, while avoiding fads.
This demands a rigorous approach and combines continuous, thorough research and distinctive
insights with sustainability principles. Monetization potential, sufficient scope and strategic
timing are key criteria when assessing investible trends. But, the search for sustainable themes
starts with identifying the challenges inherent in sustainable growth and prosperity.
The final step is about uncovering those companies that are best positioned to benefit from
each trend or theme in the long run. It is also about avoiding the multitude of losers – i.e.
the obvious victims of change and disruption. Top-notch fundamental analysis of individual
companies is the backbone of this stage of the investment process.
However, the process of categorizing companies as thematic winners and losers can be
significantly simplified by using a set of models that do not belong to a fundamental investor’s
standard toolkit. These include tools such as the company life-cycle model, relative industry
profitability and the business model lens.
At its root, a trends and thematic investment approach is an underreaction strategy. It is an

underreaction to long-term information such as demographics, and to non-linear change
caused by phenomena such as technological disruption. The challenge for trends and thematic
investors is to outshine other market participants by using long-term information more
intelligently and by being exceptionally quick to respond to non-linear change.
With all these characteristics, trends and thematic investing can arguably be considered active
management at its best.

Important information
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restricted foreign schemes under the Securities and Futures Act, Chapter 289 of

Credits
We would like to show our thanks and appreciation to all Robeco and
RobecoSAM colleagues who contributed to the creation of this book
in writing, editing, providing input and feedback, among whom
(in alphabetical order):
Rainer Baumann, Steef Bergakker, Sam Brasser, Anna Heldring, Johan
Hillebrand, Peter van Kleef, Mark van der Kroft, Yann Morell y Alcover,
Tania Patel, Sharolyn Reynard, Clarinda Snel, and François Vetri.
Contact
Robeco
P.O. Box 973
3000 AZ Rotterdam
The Netherlands
T +31 10 224 1224

I www.robeco.com

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The Big Book of Trends and Thematic Investing

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1 0 1 0 0 1 1 1 0 1 0

0 0 1 THE BIG BOOK OF 1 0 0

Moving beyond storytelling

For professional investors

Prepared for the future 4

1. Why trends and thematic investing? 6

Interview: Prof. Hendrik Bessembinder 13

2. Three megatrends that shape our world 16

Interview: Steven van Belleghem 28

3. What makes a trend investible? 31

Infographic: From tangibles to intangibles 44

4. From megatrends to sustainable investment themes 49

5. Identifying structural winners 61

4 | ROBECO | The Big Book of Trends

One of the decisive ingredients in this investment approach is top-notch research.

Another key aspect to this approach is sustainability. Sustainability is a long-term force

Mark van der Kroft

5 | ROBECO | The Big Book of Trends

6 | ROBECO | The Big Book of Trends

The concept Figure 1: AuM for European trends and

Structural changes make it difficult for incumbent, dominant companies or business

What are trends and themes?

TRENDS VS. THEMES:

– Common trends investing approach: observe how energy composition is

8 | ROBECO | The Big Book of Trends

Overarching digitalization trend

Digital consumer Digital finance Digital enterprise

– Gaming – Cashless payments – Move to cloud architecture

Why is a trends or thematic approach useful for investors?

9 | ROBECO | The Big Book of Trends

Figure 3: Wealth creation by industry in the United States from 1926-2019

Source: CRSP, Robeco. Market: US. Time period: 1926-2019.

10 | ROBECO | The Big Book of Trends

FUN QUIZ | WHO SAID:

Trends and themes are not hype

Sectors move through continuous cycles

Not all trends and thematic solutions are created equal

12 | ROBECO | The Big Book of Trends

Photo: Scott Mitchell

‘Most stocks do not

Hendrik Bessembinder is a professor and holds

13 | ROBECO | The Big Book of Trends

14 | ROBECO | The Big Book of Trends

‘There are more people who think or claim to be

15 | ROBECO | The Big Book of Trends

A trends and thematic investing approach aims to identify, in a

are: transforming technologies, changing sociodemographics and A. 9%

percentage could go up to 28%.

Mapping the broader trends and themes landscape

17 | ROBECO | The Big Book of Trends

Figure 4: The WEF’s risks-trends interconnections map of 2019

Source: World Economic Forum Global Risks Perception Survey 2018-2019

18 | ROBECO | The Big Book of Trends

Megatrend 1: transforming technologies

Table 1: The four industrial revolutions

Figure 5: The most influential Industry 4.0. technologies

80% 72% 68% 64%

20% 17% 10% 9% 7% 6%

19 | ROBECO | The Big Book of Trends