Catherine Wood is New York-based chief investment officer for AllianceBernstein's thematic portfolios. She joined Alliance Capital in 2001 (before it became AllianceBernstein in 2006) from Tupelo Capital Management, where she co-managed global equity-orientated portfolios. Before that, she was with New York-based Jennison Associates for 18 years, in posts including portfolio manager, equity research manager and chief economist.
AllianceBernstein's Global Thematic Research Portfolio launched in Asia in November, while the global product has been available since November 2008. It has $1.5 billion in assets under management now and a capacity of $10 billion or $20 billion; the firm is working on where to set the cut-off point.
The fund focuses on five broad themes that the firm feels have global and cross-sector investment implications for at least the next three to five years: abating climate change; Web2.0 (the next generation of computing and the internet); the genomic age; the emerging middle class; and heightened global economic cyclicality.
This diversified approach reflects comments made in early 2008 by Ranji Nagaswami, New York-based chief investment officer at AllianceBernstein, about seeking to offer broad diversification rather than chase a hot theme.
AsianInvestor: One of the advantages of themed investments is that they are easy to understand and offer an attractive method of long-term, conviction investing. Does having such a diverse portfolio of themes defeat the object of that somewhat?
CW: It's true that in Asia, for example, investors are often attracted to a single-theme approach. But there are downsides to the single-theme investment process. Portfolio analysts focused on one theme are not as likely to jump off that theme, because it's one they know and their career often depends on its sustainability.
Also, if a single-theme portfolio is really working well, it might attract a lot of capital very quickly, but in a bust it could also lose it very quickly. A multi-theme portfolio avoids the volatility and higher risk that accompanies single-theme portfolios, while still maintaining the flexibility to add or delete themes as the world changes.
Given the cutting-edge nature of some of the themes in the Global Thematic Research Portfolio, one would expect most of the investment to be into developed markets. Is that the case?
Whereas a lot of portfolios are bottom-up, we start by taking a top-down view of the world, from 30,000 feet up. We don't start by looking at individual stocks, but at big-picture themes and trends.
We then take a point of view on the outlook for the global economy. Since the crisis we have gained a lot of information to power that part of the process. And that has pointed us towards the most capital-friendly parts of the world, It just so happens that Asian countries, especially China, took the most capital-friendly response to the crisis.
As a result, we are overweight Asia. Our absolute allocation to Asia is 27%, overweight the MSCI All World by 15% (that index has a 12% allocation to the region). The US has been less capital-friendly, so we are underweight the MSCI All World's US allocation by 7.5%, which is unusual for a global portfolio.
33 of AllianceBernstein's 260 buy-side analysts globally are based in Asia ex-Japan, plus we have 13 in Australia.
Tell me about your investment approach to your five themes, starting with genetic medicine?
The basis for this theme is that technological advances in genomics and cellular therapy have increased the speed and reduced the cost of genetic analysis. Hence, knowledge of the genetic underpinnings of disease and cellular biology is increasing at an exponential rate.
While it's true that there are more cutting-edge and technology firms in the genomics space in Europe and the US [than in Asia], China has made a major commitment to the sector. The Beijing Genomics Institute has just ordered 128 next-generation DNA sequencers. The kind of edge we have is that we knew China was likely to make a big splash in this space.
We are invested in companies like [US-based] Illumina, which has 80% of the market globally for DNA sequencers, and [biological research firm] Qiagen.
Illumina realised several years ago that technology advances would soon enable a market for the mapping of human genomes on a huge scale. They moved aggressively to become the market leader, and we think it will be very hard to dislodge the company from that position.
We acknowledge that we are often early into our themes, and that was the case with genomics. Many fundamental analysts are not inclined to do a huge amount of work on a story that may be a few years away from major investment inflows. That's where we can gain a big edge by doing the work early.
With regard to the climate change abatement theme, how is your fund different from others investing in this area?
Our approach here helps illustrate why thematic investing with big-picture research behind it helps us.
People are surprised when they see there is no wind, no solar and certainly no ethanol-related stocks in the portfolio, which are common in other climate-themed funds.
We will never invest in corn-based ethanol, for example, as it does more damage to the environment than it helps it. Land is being cleared to grow extra corn to provide both food and fuel - that's environmentally unhealthy, especially for a fuel that is less efficient than fossil fuels.
But we do invest in smart-grid technology. Wind power is generated in the western part of China and is needed in the east; smart grids are needed to transfer it. We also have carbon-sequestration companies in the portfolio - Denbury Resources is the best carbon-sequestration play out there, although it's thought of as an oil company.
Then there are hybrid and electric vehicles -- we're buying lithium-ion battery makers such as [Shenzhen-based] BYD, as battery technology is the most important gating factor affecting electric and hybrid adoption. We bought [US battery maker] A123 at its IPO. We don't buy many IPOs in this portfolio, but we do it when we know a company well and like what they do; AllianceBernstein owns A123 in its venture fund as well.
How do you focus on the 'emerging middle class' theme?
From an Asian perspective, most people think of China and India, but we think largely of China, as having crossed a certain threshold [in terms of the number of middle-class members of the population].
Annual income of $6,000 per capita l tends to be a point when consumption starts to rise strongly as a percentage of GDP. The US crossed that point in the early 1970s, and now consumption there is 71% of GDP. That means the US now needs to [go the other way and] save more, just as China is likely to continue to consume more.
One play to take advantage of this is auto consumption. Based on survey data, the car-ownership ratio in China has risen from 12% of households to 28% last year. If China were to follow the growth path of Japan in the 1970s, when they passed $6,000 annual income per capita, car ownership in China could reach 80% within 20 years -- a very long tail indeed.
We bought our Chinese auto stock, BYD, in November 2008, in mid-crisis, as we anticipated some of that growth. Chinese auto sales rose 50% last year.
And what about the other two themes, next-generation computing and heightened cyclicality?
The broadband revolution is no longer about building infrastructure, but more about moving technology into 'the cloud'. We believe that those who think a new PC [personal computer] cycle is at hand because of the recent launch of Windows 7 will be disappointed. Microsoft has a lot more competitors than it used to have, and new technologies like virtualisation will enable a new kind of 'thin client' PC.
Hence, we don't own stocks such as Intel, Dell or Microsoft, but companies like Salesforce.com, a business software distributor; Red Hat, an open-source software firm; and Rackspace, which provides managed hosting.
As for our heightened-cyclicality theme, we believe the monetary and fiscal stimulus provided around the world in response to the global financial crisis has been extreme and will take many years to unwind. The economic cycles in years to come are likely to be shorter in duration, but more violent in magnitude -- we see a long period of economic volatility ahead.
Right now, that may be expressed in a larger-than-expected global economic boom -- with worrying inflation implications. We can see that in the gold price - it's now a measure of our inflation fears rather than of fundamental supply. It will take long time to put the inflation genie back in the bottle.
We are expressing this theme currently through exposure to gold stocks such as Barrick Gold and commodity producers such as Rio Tinto and Petrobras.