What is it about thematic funds that has captured the fancy of investors over decades?
Way back in 1948, investors in the U.S. were presented with The Television Fund, which sought to profit from the burgeoning television industry. Then there was the Atomic Development Fund; Science and Nuclear Fund; Nucleonics, Chemistry & Electronics Shares; the Missiles-Rockets-Jets & Automation Fund; and Steadman Oceanographic & Growth Fund. More recently, we saw the ARK Funds serve a platter of thematic investments - Innovation, Genomic Revolution, Next Generation Internet, 3D Printing, Autonomous Tech & Robotics, Space Exploration & Innovation.
In India, we have numerous themes too – Media, Energy, Infrastructure, Consumption, Banking and Financial Services, Defence, Innovation, Exports, Services, Momentum Strategy, and so on and so forth.
Across geographies and asset management firms, the compelling narrative is the recurring motif. The story that is weaved. To get a share of your wallet, it must first capture your imagination and fuel expectations of outsized returns. Thematic investing appeals to the worst investor instinct: the desire to get rich fast by discovering something that others don’t know. A horrid cocktail of avarice and self-confidence. A story is spun. The investor falls for it, and bites the bullet.
I constantly hark back to what philosopher Jean Paul Sartre so profoundly said: “man is always a teller of tales, he lives surrounded by his stories and the stories of others, he sees everything that happens to him through them.”
Politicians know this.
Companies know this.
Marketeers know this.
Asset Management Companies know this.
The storytelling of Apple.
Money manager Vitaliy Katsenelson adapts this train of thought to elucidate how Apple has made a mark. Born in Russia and an immigrant to the U.S., Katsenelson is now the chief executive officer and chief investment officer at Investment Management Associates.
Here’s what he articulated in a recent note.
When it introduces a product, Apple doesn't just spend the time telling you what it will do for you; it directs as much effort to telling a very detailed story about how it made the product.
Read this, on the introduction of the Apple Watch: “Our engineers have custom-designed a new alloy that is 60% stronger than standard alloys but just as light. This requires precision alloying. Raw aluminum of exceptional purity is first heated to a molten state, and tightly controlled amounts of magnesium and zinc are then added.... Next, a finely tuned extrusion process creates a uniform surface free of defects. After being meticulously formed, each case is machined, buffed and then textured with microscopic zirconia beads to achieve a consistent satin finish...”
This is a tiny excerpt where Apple tells you a story about how much soul they put into making each little component of their product. Sure, you may not understand a word, but the tech-speak combined with the liberal sprinkling of adjectives will have you believe that only Apple cares so much about creating such incredible products.
It even names the components. Its display is Retina. Do you know the name of the display of your Dell laptop? Is Apple's display better than Dell's? Is it identical to Dell's? Its keyboard is called Magic. Software which only Apple users can use to call each other is called Facetime, which is actually a verb now.
In its storytelling, Apple wants you to fall in love. When you love a story, you get emotionally invested in it and develop a connection with its product. It gives meaning and is aligned to your identity. You are hooked!
Apple is the best storytelling company on the planet and a very critical element of its success. Little wonder that Apple CEO is called the brand’s storyteller-in-chief.
The force of the narrative.
When you force detail into an image, it becomes larger than life.
Let’s say that I have to warn you about survival in a rural area. I could say: “Please don’t sit under a tree once it gets dark as snakes may appear”.
Now I share the same cautionary note with much more drama and flair: “There used to be this really young man, who would love to sit under that tree watching the moon and enjoying the quietness. One day, a snake rapidly coiled around his neck and strangled him to death, and slithered away.”
The second one evokes fear and awe, brings emotions into play. You are more likely to pay heed to trees in the dark.
The same applies to investing. The magic bullet that a particular fund offers. The scientific way the fund manager looks at data. The superb research on focused stocks. The brilliant processes. The untapped potential of a sector. The promise of a sunrise industry.
Nobel Laureate Robert Shiller is known for his work on the importance of narratives in economics and the financial markets. Years ago, economist Brendan Markey-Towler discussed how these stories affect expectations. Then the story becomes the expectation. And expectations shape behaviour.
Don’t let anyone sell you a dream.
Narratives are an intricate part of human existence. And finances are not excluded.
So don’t be naïve in assuming that stories do not have a huge impact on your investing behaviour. It drives us in directions that may not be the most optimal at best, and dangerous at worst. You can blame fate and destiny, but it is the lure of the story line being played out that has a large influence on our decisions.
Just because you believe the story doesn’t make it real. Admit that there is a chance you are getting played. Bounce the idea off someone else. Welcome a contrarian view.
Remember, the market does not care about the beautifully crafted story. The market doesn’t care about your ego and your money. And your aim is not to satiate your ego; your aim is to make money.
Why do you believe that the investment is likely to outperform? Don’t just repeat what was told to you. Dig deeper. Look at data. Look at how other funds in the same category have performed. Look at the track record of the fund house and asset manager. Look at economic data; does it support the theme of the fund?
Ask yourself, what is the time frame you are comfortable with? With thematic funds you need to figure out an exit strategy.
If this investment does not pan out as expected, are you in a position to accept the losses?
In 1994, Jeff Bezos held 60 meetings with individuals who he felt were potential investors, to persuade them to each invest $50,000 to create an online bookshop. He failed to convince 38 of them. His parents were part of the 22 who decided to go along for the ride. He warned them that there was a 70% chance that they may never see that money again. Apparently, he told them, “I want to come home at dinner for Thanksgiving and I don’t want you to be mad at me.”
Don’t expect such honesty from the industry. So do your homework, err on the side of caution, and don’t be easily parted with your money.
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