Thematic Investing with Goldman Sachs: Key Megatrends

Lydon opens with a query into how investors and savers need to approach investing differently going forward when coming from an environment that has favored a transition from active to passive over the last decade. Koch answers that there are several main reasons savers will need to adjust their thinking and strategies moving forward, but the primary one is the belief by Goldman Sachs that the traditional 60/40 portfolio simply doesn’t work anymore.

“That set-it-and-forget-it approach, which frankly did work very well over the last ten years because the U.S. equity market, even the market cap-weighted passive U.S. equity market, was such a strong performer, but over the next ten years, we expect returns to be much more muted,” Koch says.

Koch explains that the traditional 60/40 portfolio typically offered 10% compounding returns over the last decade, but looking forward, they believe that it will offer 3%-4% at best.

The second reason savers will need to change their approach to investing is that market cap-weighted benchmarks are backward-looking in nature and not indicative of future performance.

“The challenges with those market-cap benchmarks are really two-fold; the first is they’re hyper-concentrated. 21% of the S&P 500 is now, of course, in 1% of the stocks, just the FAANGs,” Koch explains. “To put that into perspective, just those FAANGs stocks have a market capitalization now that is greater than all of global markets emerging equity.”

Because of their backward-looking perspective, the market-cap benchmarks are not positioned to capture the growth and innovation that will happen in the coming decades; as Lydon explains, over the course of 10 years, leaders and industries change and evolve.

One of the biggest secular growth trends that Koch is looking forward to going forward is technology and the innovations happening within it. Millennials (born between 1980-2000) now make up the largest consumer spending bracket, with 85% living in emerging markets. Goldman Sachs invests in the next generation of technology companies worldwide to recognize the growth that is happening within the sector.

Koch also highlights secular growth trends in the innovations happening within healthcare and sustainability worldwide as countries work to meet the Paris Agreement goals of net-zero carbon emissions by 2050.

“Similar to how we approach investing in our portfolio companies, we understand the need to disrupt ourselves in a highly competitive and fast-moving asset management industry,” Koch says, discussing Goldman Sachs’ approach to thematic investing. “We’ve been creating differentiated, dynamic solutions to help our clients position themselves on the right side of disruption.”

Goldman Sachs launched its first thematic fund six years ago and has over $21 billion in assets to date, including the launch of a suite of five new ETFs aligned with what Koch calls the “megatrends” within the U.S. currently.

The funds launched include the Goldman Sachs Future Tech Leaders Equity ETF (GTEK), which seeks to give exposure to next-generation technology, the Goldman Sachs Future Consumer Equity ETF (GBUY), which invests in companies aligned with millennial spending, and the Goldman Sachs Future Health Care Equity ETF (GDOC), which invests where technology and healthcare meet.

Also included are the Goldman Sachs Future Planet Equity ETF (GSFP), which invests broadly across industries in the transition to sustainability, and the Goldman Sachs Future Real Estate and Infrastructure Equity ETF (GREI), which offers a low-beta, high-yield way to invest in the real estate and infrastructure that houses these secular growth themes.

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