Pedro Palandrani is the vice president and director of research on thematic investing at ETF provider Global X. This week, he spoke with Opto Sessions regarding the fund manager’s strategy for deciding which themes are worth investing in, and what companies best represent those themes.
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Pedro Palandrani says he sees things changing “right in front of our eyes”, and believes that “the greatest failing of the human mind is the inability to understand exponential function”.
To explain what he means by this concept of exponential function, he points to “general purpose technologies” like artificial intelligence (AI), blockchain, Internet of Things and cloud computing, which have the potential to “disrupt every single industry that we can think about”. He refers to the AI chatbot ChatGPT gathering one million users within five days as an example of the “exponential nature of adoption of new technological developments”.
Palandrani is vice president and director of research on thematic investing at Global X ETFs. Before coming to the New York-based fund management company, he was an equity research analyst at Cabot Wealth Management, where he used exchange-traded funds (ETFs) to create multi-asset portfolios.
Artificial intelligence (AI), blockchain, Internet of Things and cloud computing have the potential to “disrupt every single industry that we can think about”
While most traditional ETFs track exchanges like the S&P 500 or the FTSE 100, Global X has made its mark in the field by going thematic. Since launching its first thematic ETF in 2010, it have established 36 more currently on offer to investors.
Global X’s thematic approach
That first ETF was the Global X Lithium & Battery ETF [LIT]. While today the fund is down 10% over the past month, it is comprised of companies that do “something that we fundamentally believe in,” Palandrani says.
In 2010, electric vehicles (EVs) were not a popular choice among consumers. At the time, Tesla’s high-end Roadster sportscar, the first EV to use lithium-ion battery cells, was only two years old.
Just 11 years later in 2021, the global EV market was valued at approximately $178.5bn. According to Beyond Market Insights, that number will grow to $1.1trn by 2030 at a compound annual growth rate (CAGR) of 22.5%. Between 2010 and 2021, the global market share of EVs went from 0.01% to 8.57%.
In his conversation with Opto Sessions, Palandrani demonstrated this as an example of how Global X is “always trying to be ahead of the curve… to understand all of these changes that could potentially disrupt our economies, and [looking for ways to] present that to our clients in an intelligent and unique way”.
Top-down, then bottom-up
In a video on Twitter, Palandrani describes the Global X approach to thematic investing in two steps, the first step being to look at markets from the top down. In his interview with Opto Sessions, he talked about “identifying those disruptive macro-level events that are changing our economy”.
Palandrani emphasises “a holistic approach” to understanding the different ways to target an investment opportunity. In the example of EVs, an ETF might highlight industries vital to the success of that market. Lithium-ion batteries represent one of the “picks and shovels” that Global X goes looking for when it settles on a theme.
The second step is bottom up – identifying the companies that “are best positioned to benefit from the materialisation of that theme”. That means looking at pure play companies that derive at least 50% of their revenue from the theme in mind.
While not every one of the ETFs draws that hard of a line, most of them do. One example is the Global X Cybersecurity ETF [BUG]. Despite the fund being down 2.2% in the past month, it stands to benefit from the widely-regarded resiliency of cybersecurity.
Defining themes worth investing in
A three step process determines which themes get launched as Global X ETFs, the first one being a search for “high conviction ideas”. This involves looking at the total addressable market, how penetrated it is now and its potential over the next 10 to 15 years. If companies within the theme have faster than average revenue growth rate increases, that’s a good indicator of potential.
The second step is determining the “investability” of the theme – that is, whether there are at least 20 to 25 public companies within the theme providing pure play exposure to it.
It’s a limiting factor – take space technology. Palandrani says there are at most seven publicly traded companies that would pass the litmus test – not enough to justify an ETF. While other funds have created funds for that theme, Global X’s emphasis on pure play exposure makes that a dealbreaker.
The third step is to identify themes with a long-term time horizon. Generally speaking, they look for a 10 to 15-year investment potential.
In 2019, Global X received suggestions to start a “trade wars” ETF, which could have offered near-term gains off the back of political tensions between China and the US. For Global X, however, it didn’t look like a long-term play, considering that political tensions tend to strike a balance over time.
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