NEW YORK (
) -- Plenty of funds invest according to themes. The portfolio managers spot a trend in the economy and they buy stocks that stand to benefit. Popular themes include the aging of the population and the growth of Asian economies.
The goal of theme investing is to find companies that have the wind at their backs. Such businesses can race ahead for years.
While many trends are broad developments that have been heavily covered in the press, some top-performing funds are betting on less well-known trends. These will only benefit a limited number of stocks. But if the narrow themes unfold as the portfolio managers expect, the funds could reap big returns.
A strong-performing theme investor is
Waddell & Reed Core
. The portfolio managers target four or five themes. The idea is to find companies that will do better than the market expects for the next two or three years.
A favorite theme is heavy-duty trucks. Before the recession, more than 300,000 trucks were sold annually, says portfolio manager Gus Zinn. Then sales sank to around 150,000, punishing stocks of truck makers and suppliers of parts. The industry remains depressed, but that will change in the next several years, says Zinn. Equipment is wearing out, and demand for heavy-duty trucks will increase as companies transport goods bound for growing foreign markets.
To profit from the rebound, he is holding shares of truck maker
, an engine producer, and
, a parts maker.
"In the next few years, sales will come back to around 250,000 trucks," says Zinn.
Another dedicated theme investor is
, Roosevelt aims to stay diversified by focusing on eight or 10 themes, including a mix of growth and value stocks. The fund has 8.4% of assets in stocks that will benefit from clean energy and 5.9% in companies that will gain from the increasing wealth of consumers in emerging markets.
Among the more discouraging trends in the emerging markets is the growth of diabetes, says Nainesh Shah, a Roosevelt analyst. As consumers in India and China spend more on food, obesity is becoming a bigger problem. That is leading to diabetes, says Shah. As India and China spend more on combating the disease, demand is growing for
, a Danish company that makes insulin and other products used to treat diabetes.
"They already have a 600-person sales force in China, and the demand will continue growing," says Shah.
Hodges Small Cap Fund
aims to take advantage of trends well before other investors take notice. Portfolio manager Eric Marshall currently likes steel companies. The industry was hurt by the recession, and sales have not yet started to recovery. But Marshall says that there are good reasons to believe that the cycle is about to turn. He says that inventories are very low, and prices are starting to creep up. As the economy recovers, steel prices could climb sharply. That will push up the stocks.
"We don't know exactly when the turnaround will occur, but this is the time in the cycle when you want to buy the stocks," he says.
, which operates mini-mills and recycling facilities. He says that there is little downside risk in the stock because the price is so low. While the shares trade for around $17, the company has assets worth about $13 a share.
The portfolio managers of
start by identifying about 25 trends. Then they search for high quality industry leaders that stand to benefit from the themes. A favorite trend is in the declining cost of computing power. Portfolio manager Dave Carlsen notes that lower costs will not help all companies equally. Some technology companies will fall by the wayside, while others will take advantage of lower costs to boost sales and profits.
A holding is
, a maker of semiconductors used in wireless communications. "They are thriving by providing more service for less cost," says Carlsen.
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Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.