There is a view that now exists in pockets – ‘buy and hold style of investing is dead’. And at the outset, I can understand why it exists. Businesses are affected by numerous changes like technology, regulatory or policy changes etc. It is becoming difficult to just buy and forget. So I feel, “Buy and hold” investing has become “buy and watch”. One should still plan for a long-term horizon but keep a watch on changing trends.

I started exploring the concept of Megatrends Investing. The term “Megatrends” was coined by John Naisbitt (1980s) describing long term changes that have a transformative impact on businesses. By early 2000s, a lot of investment houses had adopted this approach for determining the future of their investments. In recent years, the adoption of this concept seems to have accelerated.

What is Megatrend Investing?

Change is constant. Sometimes changes often repeat in a cycle. And sometimes, changes are transformative forces that shape our businesses and societies. These long-term changes that have a significant impact on our future are megatrends. They create many trends within them as they impact different sectors and industries. By understanding these megatrends, investors can position themselves to benefit from the future opportunities they present.

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Megatrends investing is about uncovering, identifying and understanding forces that can change the way businesses and consumers operate. And discovering the investment opportunities they create. Short-term investors tend to be opportunistic and focus on the direction of the next tick. However, long-term investors are more strategic, looking for the direction of growth and endeavouring to identify where the growth of a company/companies is underappreciated. Typically, people tend to underestimate long term non-linear growth prospects. Megatrends investing helps cut through short-term noise and focus on long term growth opportunities.

A smart businessman allocates capital to an idea that has good future growth potential. Many businesses use megatrends to forecast where future profit pools lie and then work backward to define a path to reach them. Megatrends are also used to drive innovation within organisations. An investor needs to think like a businessman when investing. Using this approach avoids surprises by trends that were foreseeable. Instead, trends can be integrated into the forecast using this systematic approach.

Megatrends Investing needs to be the core of investor’s portfolio

Studying megatrends increases the predictability of forecasted growth. This is an important strategy for investors and can be considered to be the core of the portfolio. What are some of the other benefits of this strategy:

  • Bottom-up analysis of all companies in the universe to consistently identify individual companies which will thrive over long-term requires enormous resources and research effort. It’s simpler to identify broad trends and themes with exponential growth potential and then focus on companies with identifiable investment potential.
  • Megatrend investing also helps look beyond rigid sectoral or market cap classifications, which do not provide any insights about future growth potential of companies, and in risk mitigation through diversification.
  • Evaluating the relative potential of individual trends and diversifying positions across trends with highest potential makes the portfolio future aligned.
  • Studies have shown that equity returns tend to be unevenly distributed over time, industries, and individual stocks. However, equity returns do correlate with profit stream dynamics, which is driven mostly by long-term trends. Thus, a megatrend approach is better suited for tracking profit movements and benefitting from them.
  • Megatrends approach also helps negate behavioural biases. It is tempting to linearly extrapolate recent experiences while making future projections (recency bias), ignoring non-linear changes. Megatrend investing helps understand non-linear changes and take advantage of market biases.

Through this approach investors get a portfolio that is structurally geared towards companies that are high growth compounders with tailwinds to create high economic value for shareholders. It is about investing today by anticipating the changes tomorrow will bring.

(By Nimesh Chandan, CIO, Bajaj Finserv Asset Management Limited. Views are personal)

(Disclaimer: Mutual fund investments are subject to market risks. Read all scheme related documents carefully)