The head of investment themes at UBS explains the big trends every investor should know

Global trends and changing demographics can produce major tailwinds for companies that are properly positioned. But identifying those companies and building a sound portfolio around them is not easy.

So we spoke with Laura Kane, head of investment themes Americas at UBS Wealth Management, about what UBS considers to be the most important themes for investors.

Matt Turner: Just to start, I wanted to ask you about some of the themes and trends that you are most interested in right now.

Laura Kane: Two of the biggest demographic trends that we're following are population growth and aging. First, on the population-growth side, we're set to reach about 10 billion people by 2050. That's up from about 7 billion today, so a pretty large increase in the population.

The reason we're focused on this is that it's going to put a strain on critical resources needed to sustain human life. We are talking about the basics - food, water, and energy. And what's interesting is that most of this population growth is actually happening in low- and middle-income countries. Actually, 50% of that increase is going to come from Africa alone.

So when you think about this strain of resources, it's actually going to be most acute in some of the countries where the need is already pretty critical. So that's one trend we're focused on.

The other is aging. We're seeing people get older and live longer and we're seeing this not just in the US, where we're having 10 thousand baby boomers turn 65 every day, but in many parts of the globe. So Japan, Europe, and parts of the emerging world, including China.

This is also going to put strain on healthcare services. We expect to see a lot more investment in that area especially in emerging markets who've historically underinvested in healthcare relative to the developed world.

Those are kind of two big trends we're following. We're seeing a lot of investment opportunities around them as we think about what companies are actually going to help solve those challenges of tomorrow through innovative products and helping to get resources and services to the people that need them most.

Turner: And in terms of the population growth and critical resources, how do you invest in those themes, and what types of things are we talking about? Is it something as simple as water, or is it more resources that might be used in technology, let's say?

Kane: Yes, exactly. It could really be a wide number of opportunities, but, for example, within the water space, it could be a water utility that's helping to build out the necessary water infrastructure in emerging markets. It can also be a water utility that's investing in the developed markets in terms of making water systems better.

Right now about 28% of the water supply globally is lost through leaky piping systems and inadequate distribution. There's a lot of investment that needs to be made there. So that's just one example of an opportunity.

If you think about food, there's a lot of advancements that can be made in agriculture. We're not seeing an increase in farmland. We're actually seeing a decrease as we see populations start to urbanize and cities are starting to sprawl out especially in the emerging markets.

And what we're seeing is advances in technology that are helping to get more crops out of the same space. It could be using more machines instead of human labor or using big data and artificial intelligence to help forecast everything from weather patterns to optimizing crop-rotation patterns. So there really is a pretty wide opportunity set.

Turner: And on the demographic side, we hear a lot about there being this demographic time bomb and pension crisis wherein the working population isn't sufficient to support the pension population. So how do you see that and what are some of the solutions to that?

Kane: In terms of pensions and aging, it really depends a lot on the market. Here in the US, we're seeing baby boomers start to get to that age, and the baby boomers as a cohort relative to other segments of the population are actually wealthier because they grew up during a time of economic prosperity.

And of course that's not everyone, so there are certainly some concerns there. As individuals reach their retirement years, they'll need to have enough money to sustain themselves.

As far as the working population, I think we are going to see a greater influence of robotics. We're seeing this especially in Japan where they have perhaps the oldest population.

We're seeing robotics being used in every from schools to even nursing homes. They're using robots to lift the elderly and do all their mundane tasks. I think we are going to see more of this in other regions as well.

Turner: Necessity is the mother of invention, so clearly there's a need for these kinds of technologies. How do you play that as an investor?

Kane: I think from an investment perspective, oftentimes we're compelled to go with the obvious choice. If you're thinking about e-commerce, you may think Amazon. Social media, you think Facebook, right?

You are kind of pulled toward the giants, and those might be good investments, but I think for us, when we try to look at these major trends, we try to think more broadly to understand what are the investment implications in different sectors and different regions? Is there something that people are not seeing?

So, for example, with electric cars. Who is actually making some of those inputs that go into these vehicles? It's not just about thinking of who's the biggest player in this space. Same thing goes for e-commerce, right? You can think about logistics companies, paper and packaging companies, and oftentimes when you think about that broader ecosystem, that's where opportunities can be found because those are the companies that are not as expensively valued. So we really do try to think very holistically when we're looking at a lot of these trends.

Turner: How do investors use themes to guide their investment process?

Kane: Typically a lot of the themes that we talk about tend to be with a longer-term focus so this is actually a great complement to a portfolio with other investments that might be focused on the near term. Oftentimes the themes can be something you can invest in and then kind of forget about for 20 years and look and see that those companies have done better than the broader market due to these thematic tailwinds behind them.

I think one of the mistakes that people make is just homing in on one specific theme. That can be a smaller part of a portfolio, but for it to be a bigger presence, oftentimes we're recommending to take a more diversified approach.

Investing in a number of themes at once in the portfolio so you're insulated from that shorter-term volatility that any of these themes may experience in the nearer term.

Turner: One of the other themes I want to talk about is sustainable investing. It has seen a huge amount of growth in lots of different ways from green bonds to SRI stock funds and the like. How do you see that and where are we headed?

Kane: We are seeing a greater interest in sustainable investing.

One, there's demographics. Millennials and women tend to be more interested in sustainability. They are more interested in knowing about how the companies are investing and are actually run and what their impact might be on broader society, so that's one kind of force that's behind it.

But we're also seeing a greater understanding of what is meant by sustainable investing. Go back 30, 40 years, sustainable investing was primarily used by religious institutions to just exclude certain securities from their portfolio. Whether it's weapons, gambling, you name it.

But what we're seeing now is that sustainable investing has come to encompass actually incorporating more information in the investment process.

So not just what's in the financial statements but other information that can be found in company sustainability reports, or what can be gathered through various investor presentations, or talking with the company management to really look at the company more holistically.

Who's running the company? Are they using resources effectively? These things affect the bottom line.

So if you're using less water and energy in your process, you're spending less money on your inputs. If you're talking about a technology company, is that company treating their employees well and are they able to retain the best talent?

That's another important aspect: looking at the right factors for the right sectors. So I think there's starting to be a greater understanding of what sustainable investing can actually encompass and that it can actually be a return enhancing strategy and not only about exclusion.

Turner: Some of those tactics that you've described in terms of minimizing water usage or having all of a company's buildings be energy efficient, often those require upfront investments and they generate returns over the longer term.

How much tension is there between those kinds of strategies and some of the shorter-term capitalism that we see in markets?

Kane: I think another aspect of these cost-saving measures is that it tells you a lot about management.

How does management see the company? Are they running the company for the long term so that it's going to be a sustainable business? I think even if you don't see those recouped right away, you see what direction the company is going in and you really get the tone from management, what the board cares about, and that can tell you a lot about a company.

Turner: But there have been instances where some of those companies that have said, "We want to be sustainable. We want to be run for the long term," have run into an activist investor who has a shorter time perspective. So how does that tension work itself out?

Kane: I think it really comes down to doing the work thoughtfully. Really understanding a company at a more holistic level so, like I said, looking at what factors matter for which sector. Just having a greater understanding of what the management intention is and, for us as thematic investors, our work does tend to be more long-term focused.

So we are trying to cancel out the noise in the markets, the political environment, and really focus more on a ten to twenty-year timeframe. That's really what we're focused on.

Turner: And you mentioned millennial and female investors wanting perhaps to put more of their money into sustainable investments. Particularly for millennials, they're about to enjoy the gains that the baby boomers enjoyed through inheritance. They're about to inherit a huge amount of wealth so they really have the potential to shape how investment is done going forward. How big a force is that?

Kane: I think it's going to be a huge force, and we're already seeing it.

Surveys have been done of millennials that ask: Would you rather work for a company that's more sustainable, that sees its mission about more than just profits and improving the greater good? And largely millennials respond favorably to those types of questions.

We see that they typically respond that they would be willing to take less pay to work at those types of companies so even though they don't have the investable assets today, we can definitely see a shift in the mentality of millennials and see how it kind of makes sense that these are going to be investments that they are going to tend to prefer as they start to reach their peak earning years.

So I certainly think the millennials will be a big driver behind the continued growth that we're seeing within the sustainable investing industry.

Turner: And what does that do for companies if that is the case that more and more money is focused on sustainability from energy efficiency to how staff are treated?

If the companies that score poorly on those measures start to see their stock price decline and the CEO's bonus is less, you could see a scenario where actually that really starts to change corporate behavior.

Kane: Companies recognize this preference for sustainability.

Some of the types of products that we see released into the market are greener products, companies advertise that their fabrics are made more sustainably, or using organic cotton, or that they don't use bad labor practices in terms of using child labor. Whatever it may be. So we do see companies starting to recognize this and starting to incorporate it into their behavior.

A lot of this is due to transparency, so we're seeing more companies start to report on these sustainable metrics and, to your point, if a company is one of the few that's not reporting on some of these metrics, there's kind of no place to hide at this point because that raises a red flag in and of itself unless it's a smaller company or something.

And as we see sustainable accounting standards start to become more mainstream, we're going to start to see that companies are going to increasingly report this data, and that's going to incentivize them to really take a hard look at how they are running their business and the type of information they're going to have to start releasing down the line.