A Fund that Makes Theme Investing Work
DWS Global Thematic overcomes quirky names and high turnover.
Most stock-fund portfolio managers invest by choosing companies individually, based on their specific characteristics. At least that's the part of their strategy they emphasize. It's quite unusual to find stock-fund managers saying they try to beat the pack with a theme-based approach that puts as much or more emphasis on identifying broad trends as on simply digging up attractive individual companies one by one.
In general, that might be a good thing. Managers who base their strategy on themes might pick correct trends but falter anyway because the companies they chose had shortcomings that limited their ability to benefit from favorable tailwinds. For example, a few years ago many managers were buying big drug companies because the aging of populations would ostensibly make those firms indispensable. (That didn't work out well, for the most part.)
Another red flag for a fund strategy can be if its strategy sounds gimmicky, with names that seem like they could've been dreamed up by the marketing department rather than an investor.
However, some stock funds do talk about incorporating theme investing into their thinking. Those that have succeeded with this approach tend to choose themes that lie outside the mainstream, and to still pay close attention to individual company traits rather than just picking essentially any stock that fits one of the themes. One such fund that has enjoyed much success with such a method, in the few years since its current manager took over, is DWS Global Thematic (SCOBX). (Note: The fund's S shares, which have the longest history, are closed to individual retail accounts, but are open through other avenues such as fee-based advisors. The A shares, meanwhile, are fully open.)
Don't Worry About the Names
Oliver Kratz, who has managed this fund since autumn 2003, invests with 12 broad themes in mind. Some of them sound odd enough that they could scare off skeptical and sophisticated investors who are well aware of the dismal record of funds with overly trendy names or overly complex strategies. One of this fund's themes is called "Talent & Ingenuity"; another is "Asymmetric Negotiators." But those aren't as strange, or as complicated, as they may sound. The former refers to companies that gain their advantage through intellectual prowess and creativity, such as Apple (AAPL) (which Kratz sold after amassing huge gains). The latter phrase refers to firms that can practically name their price, such as Vale (also known as CVRD) (RIO), the Brazilian iron-ore giant, which has benefited as enormous levels of demand have allowed it to raise prices with impunity.
Companies from the same sector can be found listed under different themes. That freedom could trip up a manager. The themes could end up being simply a gloss, with the manager actually just picking stocks the conventional way and only later finding a theme to shove them under.
Kratz, though, has made this strategy work. The fund has trounced the world-stock category since he took over, even though it had a subpar 2007, when he saw better opportunities in areas other than energy. That ended up hurting the fund in relative terms as energy stocks climbed and climbed. (The fund's relative performance looks much better so far in 2008.)
He has overcome the potential pitfalls partly by choosing the right themes--but also by succeeding on the company level. The fund could've been crushed if he had bought many more banks and insurers simply because they could fit under one or another theme. But he steered clear of most of the ones that got hit hard by the credit crisis brought on by subprime-mortgage issues.
Another reason for the fund's success is that Kratz tends to invest ahead of the crowd. Of course, that's a clich�; everyone tries to do it. And he's not always right. But he did get almost entirely out of trendy China before its market crashed in recent months. He doesn't mind if the stocks in question might rise further if he's become wary of the attention they've attracted. So after amassing strong gains with seed and fertilizer firms for his "Global Agribusiness" theme, such as Monsanto (MON) and Potash Corp. (POT), not long ago he sold completely out of both of those, along with Deere & Co. (DE)--all of which are still getting plenty of notice by investors and the media and could, for all anyone knows, rise much higher.
As a result of trying to get in and out before a trend becomes too popular, the fund doesn't have the low turnover one often associates with successful fund managers. In fact, the fund's turnover rate has exceeded 140% in each of the past two fiscal years, and judging from the pace for the first half of the fund's fiscal 2008, it's headed for that range again. Its turnover rate in recent years thus is roughly triple the world-stock category average. Higher turnover can lead to increased trading costs and result in taxable capital-gains distributions for shareholders. But if the moves protect against sharp drops in value of the stocks themselves, they can be worth it.
What Does the Future Hold?
The high turnover doesn't mean the strategy is flighty. In fact, one reason this fund has thrived so far under Kratz, despite its unconventional ways, likely is that its broad themes--unlike its individual stocks--tend not to change. Kratz isn't shifting themes every few months, or every year. That would be quite a feat to pull off successfully. Rather, the current 12 themes, with minor adjustments, have been in place quite awhile.
So one can expect the fund to continue on its path, with the same strategy (though turnover might fall if the unusually high volatility in the markets slows down). Will it remain as successful as it generally has been so far in Kratz's tenure? That's a tougher call--his tenure isn't that long, and the fund's performance in 2005 and 2006 was exceptionally strong. But the process does seem to have a solid foundation, and the success not due to a few fluky calls. Over the long term, shareholders in this unusual fund probably will be happy they're in it. One thing's for sure: They certainly won't complain that their manager is simply running a index fund in disguise.
Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.