Tema launches three active ETFs: American Reshoring, Luxury, & Monopolies and Oligopolies

Tema - Press release
By Tema - Press release
May 11, 2023

Tema launches three innovative, professionally managed thematic ETFs: American Reshoring, Luxury, & Monopolies and Oligopolies

Tema ETFs (“Tema”) launches its actively managed thematic ETF offering with three strategies: American Reshoring (RSHO), Luxury (LUX) and Monopolies and Oligopolies (TOLL). These strategies are the first to address these specific themes in an actively managed ETF in the United States. All three strategies will seek to provide long-term growth through equity investment solely focused on their own respective themes.

“We are excited to be the first issuer to bring these innovative strategies to the US market” said Maurits Pot, Chief Executive Officer and founder of Tema Global, “We firmly believe that these themes cannot be accessed effectively through a passive indexed approach. Our thematic focus, bottom-up investment process and portfolio managers’ industry expertise underpins these differentiated institutional grade ETF investment strategies. Risk management lies at the core of our active investment process, aiming to provide investors with more than just access to the theme. We monitor risk through a 3-step process, identifying risk factors, assessing risk levels, and ultimately taking aim at managing these risks.”

The Tema American Reshoring ETF (RSHO) seeks to provide long-term growth through investment in companies we’ve identified as enablers and beneficiaries of the emerging American industrial renaissance. The portfolio manager for RSHO, Chris Semenuk, has over 30 years of investing experience in the US and global equity markets, and has domain expertise within industrials investing. Reshoring is a multi-year trend spurred by supply chain insecurity, geopolitical tensions, and deglobalization. Unprecedented US government spending, through bills such as the Infrastructure Investment and Jobs Act, is accelerating this trend and already stimulating growth.

The Tema Luxury ETF (LUX) seeks to provide long-term growth through equity investment solely within the global luxury industry. The portfolio manager for LUX, Javier G. Lastra, CFA, is a seasoned industry research veteran with over 23 years of experience, having served as head of consumer research at several top-tier banks including Goldman Sachs. With €1.41 Tn in annual retail sales value, the luxury industry is defined by the timelessness, desirability, heritage and exclusivity of its offerings. Luxury firms leverage strong brand power across a broad range of verticals including fashion and accessories, automobiles, beauty, and experiences. The luxury industry has historically displayed increasing resilience with minimal cyclicality, while tapping into an expanding array of growth opportunities. Existing luxury indexes are diluted with consumer goods exposure such as Nike, Apple, Tesla, thereby lacking quality luxury focus. Furthermore, the luxury goods industry has historically witnessed wide dispersion in share price returns between companies, underscoring why we believe an indexation approach doesn’t work well for luxury.

The Tema Monopolies and Oligopolies ETF (TOLL) seeks to provide long-term growth through equity investment solely within industries characterized by monopolistic structures. The portfolio manager for TOLL, Yuri Khodjamirian, CFA, is Tema’s Chief Investment Officer and has over 12 years of investment experience in global markets, having previously co-managed a fund with more than $2 Bn in assets. Monopolistic structures are defined by sustainable competitive advantages and high barriers to entry, typically leading to high margins and profitability. Over time, these quality businesses have built mission critical offerings that create irreplaceable value to their customers allowing for a resilient and durable long-term growth outlook.

Tema American Reshoring ETF (RSHO)

RSHO is the first ETF solely focused on the relocation of manufacturing and supply chains back to the United States. RSHO seeks to provide long-term growth through investment in companies we’ve identified as enablers and beneficiaries of this ongoing American industrial renaissance.

In the 1960s, American supply chains expanded towards developing countries initially driven by relative cost benefits, which ushered in an era of globalization. More recently, growing geopolitical tensions and trade disputes have significantly disrupted company supply chains. Deglobalization is on the rise, and companies are relocating production closer to end demand. This trend is particularly pronounced in the United States and RSHO aims to capitalize on this secular shift.

To ease supply chain concerns caused by growing global tensions, American industry is benefitting from $1.85 trillion in bipartisan political support through the Chips and Science Act, the Inflation Reduction Act, and, most notably, the Infrastructure Investment and Jobs Act. This unprecedented government spending2 is already stimulating growth. For example, US manufacturing job growth in 2022 was at its highest level since 1984. UBS reported3  that corporate reshoring announcements jumped 17% in the fourth quarter of 2022 compared with the prior quarter and are now tracking nearly 300% higher than the fourth quarter of 2021.

“We’re excited to bring the first reshoring product to market that is driving the revival in U.S. infrastructure, industrial, and supply chain investments,” said Chris Semenuk, fund manager of RSHO. “Reshoring is a structural trend spurred by a confluence of factors including political and trade tensions, deglobalization and supported by unprecedented government spending2. We think that reduced order cycles, lower inventories and more reliable supply chains should provide such companies with durable competitive advantages and higher sustainable growth outlooks.”

We believe reshoring has planted its stake in the ground as a secular trend, as it continues to be a longer-term goal for the majority of U.S. industrial companies looking to recover the large chunk of the industrial base the US has exported. According to the Kearny Reshoring Index, 92% consider reshoring a part of their strategy4.

Tema Luxury ETF (LUX)

LUX seeks to provide long-term growth through equity investment solely within the global luxury industry.

The €1.45 Tn Luxury industry is defined by the desirability, timelessness, heritage & exclusivity of its product offering. Luxury companies command influential brand power across a wide range of areas such as fashion, accessories, automobiles, experiences, and wellness. The aspirational nature of luxury products drives desirability, pricing and ultimately profitability.

“We are excited to launch the first luxury ETF led by an experienced industry analyst” said Maurits Pot, CEO of Tema Global. “We believe existing luxury investment indexes are undermined by construction issues and conflate bland consumer exposure with quality luxury exposure. Furthermore, the luxury industry demonstrates high performance dispersion6 between longer-term outperforming and underperforming companies. Through our experienced portfolio manager’s active selection process, our product seeks to focus on quality, pure luxury stocks. This product aligns well with our mission to democratize access to professionally managed, differentiated, institutional-grade ETF investment strategies.”

“The luxury space is currently experiencing a number of powerful tailwinds reflected in record earnings and organic sales growth” said Javier G. Lastra, fund manager of LUX. “As the luxury customer base broadens across geographies and income levels, the industry is building greater resilience and reducing cyclicality6. This is evidenced in the luxury industry’s 22%5 growth rate in 2022 amidst a deteriorating global economic backdrop. Luxury businesses benefit from both volume and price growth drivers, which can be leveraged at different stages of the cycle. For example, 2022 witnessed significant price increases without impacting near-term volume growth.”

The recent returns on equity and revenue growth rates recorded by the luxury industry mirror that of the listed technology industry7. Underpenetrated markets and generational wealth transfers could unlock new growth avenues. On the back of its economic re-opening from COVID-19 lockdowns, China is expected to become the biggest luxury market globally by 20305, representing approximately 30% of all spending5. The Indian luxury market could expand 3.5x its size by 20305, and other markets such as South Korea and southeast Asian countries are showing significant potential as long-term runways of growth. Newer generations are also playing a central role in the development of the market. Gen Y & Z accounted for a significant portion of the market’s growth in 20225, and Gen Z & Alpha’s spending rate is predicted to potentially grow 3x faster than other generations through 20305. “The following decade could be akin to another “Roaring Twenties” for luxury sales.” Says Erwan Rambourg in his publication future luxe.

Tema Monopolies & Oligopolies ETF (TOLL)

TOLL seeks to invest in businesses that provide mission critical products and services, operating in monopolistic industry structure. These industry structures are characterized by hard, sustainable competitive advantages and high barriers to entry.

“Over time, these businesses have built offerings that create irreplaceable value to their customers and society alike” said Maurits Pot, CEO of Tema Global, “Their products are often vital and operationally crucial, with the potential to create sticky and recurring revenue streams. Because of the value they create, these businesses tend to be durable and have historically exhibited attractive returns on capital over the long term8. We believe these qualities make TOLL a possibly better alternative to quality global equity exposure.”

Monopolistic industry structures are characterized as having five key barriers to entry such as non-replicable physical assets, strong network effects, government regulation, high switching costs or economies of scale. As a result, monopolies arise both in the US and around the world in a wide variety of crucial areas such as payments, toll roads, credit ratings, financial exchanges, aircraft parts or pharmaceuticals. North American railroads are a classic example of an oligopoly. The number of “class 1” large railroads in the region has gone from over 180 in 1920, to just 7 in 20229. Over $740 Bn has been invested in the industry since 198010, which has led to a fundamental step change in margins and returns. Inflation adjusted pricing for customers is down nearly 50% since 1980 while volume and productivity are up over 150%10, showing how beneficial this consolidation proved to be. TOLL seeks to invest in these companies that have historically exhibited durability and longevity.

“Many investors today focus on wide moats, which might lead them to consumer brands and technology companies. We don’t consider these industries to be true defendable monopolies because they are constantly at risk of disruption.” said Yuri Khodjamirian, fund manager of TOLL and Chief Investment Officer at Tema. “If we look at the technology space specifically, venture capitalists have invested $1.4 Tn in tech ventures globally since 201511, and over 600,000 new tech firms have been created11. Similarly in the consumer space, new generations such as Gen Z are challenging established brands and traditional distribution channels. Our fund will rather focus entirely on what we consider to be true monopolies, meaning vital industries that have market leaders, expanding barriers to entry, and durable advantages.”

TOLL companies can exhibit attractive business characteristics. They command pricing power with revenues often explicitly indexed to inflation or with built-in pricing escalators. These firms are also often associated with highly visible revenues. Some infrastructure concessions stretch out 70-90 years for example, and many monopolistic businesses have most of their revenue recur every year. Together with prudent cost management, they have the potential to generate high returns on invested capital for long periods of time, which could compound value for shareholders.

Footnotes
1 Bain & Company, “Renaissance in Uncertainty: Luxury Builds on Its Covid Rebound”, 2022
2 Congressional budget office, “The Budget and Economic Outlook: 2023 to 2033”, February 2023
3 UBS proprietary data, 2023
4 Kearny, 2023
5 Bain & Company, “Renaissance in Uncertainty: Luxury Builds on Its Covid Rebound”, 2022. Not indicative of fund performance
6 Bloomberg, based on S&P Global Luxury Index 2-year total return dispersion
7 Bloomberg, comparing global large/mid cap technology index to Tema proprietary luxury universe in terms of revenue 5-year average (2017-2022) total growth rate and return on equity 5-year average. Past performance does not guarantee future results. Forecasts are inherently limited and should not be relied upon when making investment decisions. There is no guarantee a sector will experience projected growth. In addition, there is no guarantee it will translate to positive fund performance.
8 Bloomberg, not share price return or back-test. Based on Cash flow return on investment (CFROI) comparison of Credit Suisse HOLT Cash Flow Return on Investment (CFROI) 10-year average, US Treasuries 10-year yield as of 26/10/2022, Wide Moat Portfolio sourced from Morgan Stanley and Counterpoint Global which includes stocks selected by the team there based on those commanding market share in their primary market above 20%. The measures above refer to the underlying securities of the holdings in the portfolio and should not be considered reflective of future fund performance. Past performance does not guarantee future results. It is not possible to invest directly in an index.
9 Wolfe Research ;  ICS magazine, 2023
10 Association of American Railroads (AAR), 2021 & 2023
11 Crunchbase, 2023