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Introduction

ClearMacro’s Theme Ratings have been developed to help investors build more structure and transparency into their thematic investing.

Our core mission is to help our clients to minimise the natural biases that often impact the performance of investment decisions. We apply semi- and fully-systematic investment frameworks to data, to direct attention to areas requiring critical focus.

A complementary approach is to screen the investment universe on a qualitative basis to identify trends in politics, technology and social developments that will drive returns.

Qualitative analysis can be combined with quantitative to give additional depth to our rich source of information sets.

While there is no shortage of powerful underlying themes influencing market returns, investors often have difficulty forming linkages in a structured and transparent way.

ClearMacro’s Theme Investability Criteria address this challenge, delivering investible, nuanced investment recommendations by systematically evaluating a theme’s credibility, pricing, and alignment of the macro environment to its performance prospects.

Thematics Framework Primer

Figure 1: ClearMacro’s TIC (Theme Investability Criteria) Test - is the theme investable now, and if so, with how much risk capital?

Has the theme been stress-tested?Is there accountable implementation?Is it timely?

Are overall return prospects a headwind or tailwind for the theme?

Is there sufficient upside or has the theme already been “priced in” by the market?

Credibility

● Integrate Thematics into a Systematically anchored investment process.● Screen individual theme investability and dynamically allocate risk capital.● Analyse what themes mean for overall return prospects.

Pricing

Alignment

Theme Investability Framework

In ClearMacro’s thematics framework, a theme is investable if it meets 3 criteria:

● Is it credible?● Is it attractively priced?● Do overall return prospects support the

theme (does it have macro headwinds or tailwinds)?

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Defining a Theme

At the core of ClearMacro’s systematic investment framework is the real-time processing of vast amounts of public, third party and proprietary datasets; screening out and scoring the data which is relevant to investment decision-making.

ClearMacro’s investment themes represent a different approach - stand-alone investment views with a high qualitative bias and a multidisciplinary analysis framework. They are long-term and fall into one of three horizon categories:

● Multi-cycle - mega/super-cycle trends that play on structural drivers of change.

● Cyclical - returns are typically dominated by two or three themes, seldom repeated in consecutive cycles.

● Within-cycle - typically early/late and mid-cycle plays.

Credibility Rating

Credibility is subjective, but can we provide a more accountable framework to justify the opinion?

First, our strategists produce a deep dive research note, applying theoretical rigor to stress test the theme. Next, a transparent implementation basket provides accountability, with price targets indicating where the theme would be fully priced in by the market, and at what level it would not be priced in at all.

Finally, we assess the relevance of the theme by subjectively, but transparently, estimating a probability “range” that the theme will impact market impact returns over the next 6-12+ months, and mapping this estimate to a Credibility Rating.

Pricing Rating

The theme may be credible, but if it’s already fully priced in, why invest in it now?

Our approach is to invest dynamically in themes, with allocation sizes influenced by the attractiveness of prospective returns. The relationship between market pricing and theme targets is tracked as a signal between 0% to 100% (i.e. not priced in at all, to fully priced in), and this relationship is mapped to a Pricing Rating (Figure 4).

Figure 2: Impact probability mapped to a Credibility Rating.

Figure 3: We evaluate by how much the market has already discounted the theme.

Figure 4: We map the market discounting to a rating..

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Alignment Rating

The theme may be credible and priced attractively, but if overall macro headwinds are against it, why invest in it now?

We counterbalance the two previous inputs with insights from our systematic toolbox, ClearENGINE. ClearENGINE shines a light on return prospects for each theme, by linking our signals to each member of the theme implementation basket, and mapping the analysis to a Theme Alignment Rating.

Theme Investability Rating

ClearMacro’s TIC test reconciles these 3 ratings into a single investment conclusion (Figure 6).

Each conviction level (0 to 3) for each rating is aggregated, to a maximum score of 9, and then averaged to a score of 0 to 3. The score is mapped to a final investability rating.

Figure 5: We evaluate what ClearENGINE’s signals are telling us about the theme’s return prospects, and map the analysis to an Alignment rating.

Figure 6: Theme Investability Criteria are reconciled to a single Theme Investability Rating.

One approach is to build a dedicated theme portfolio. ClearMacro allocates risk capital dynamically to themes based on their Investability Rating.

The allocation levels in Figure 7 represent the recommended capital allocation to the theme in a stand-alone theme portfolio.

ClearMacro maintains a live portfolio with the NAV shown in Figure 8 and theme-by-theme attribution in Figure 9.

Figure 8: ClearMacro’s Live Theme Portfolio NAV.

Figure 9: Theme-by-Theme Attribution.

Figure 7: Theme Capital Allocation Matrix

Portfolio Applications

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Transparent

An alternative approach is to integrate themes with all other return drivers in your decision-making process.

But an asset is typically impacted by multiple conflicting themes (Figure 10).

Figure 10: Multiple themes often conflict. How do you process this into a single view?

ClearMacro’s approach (Figure 11) is to analyse the sensitivity of each member of the investment universe to the combined impact of all themes. This single theme rating for each asset, an example of which is shown in figure 12 for Singapore equity, can then be integrated with all other return drivers via ClearENGINE’s Investment Ratings framework.

Figure 11: How ClearMacro reconciles multiple themes into a macro view.

Each theme receives a Medium, High or Very High conviction level.

Each market receives a single theme rating based on the alignment of each theme’s bullish/bearish theme ratings.

Diversified

Every theme receives a Bullish, Bearish or Neutral rating from for each theme.

OneMarket Specific Theme Rating

Market Impact

Conviction

Transparent

Diversified

Figure 12: Every individual member of the investment universe receives a “Theme Investability Rating” which measures the combined impact of all themes.

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Case Study 1: Contracting Liquidity

Is the theme credible?

● ClearMacro’s strategist team produce a deep dive research report.

● A transparent implementation basket (Figure 13) is long a selection of fixed income assets against cash, and we target the basket NAV to fall in value.

Figure 13: Accountable Implementation Basket.

● Finally, Analyst Conviction Level is mapped to a Credibility Rating (Figure 14). This is subjective, but updated monthly.

Figure 14: Theme credibility rating

Is the theme attractively priced?

● Based on transparent price targets, this theme is only 11% “priced in” by the market and when mapped to our ratings bands, receives a max O/W Pricing Rating (Figure 15).

Figure 15: Pricing Rating

Are Return Prospects Aligned?

ClearMacro’s multi-horizon Investment Ratings are a tailwind to the theme’s performance prospects driven by medium and long-term projected fixed income underperformance.

Figure 16: Alignment Rating - Return head/tailwinds?

Is the Theme Investable?

Based on the TIC test, it receives the highest Theme Rating possible (Figure 17), and therefore a maximum capital allocation in our Theme Portfolio.

Figure 17: Theme Investability Rating

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Case Study 2: Protectionism

Is the theme credible?

● ClearMacro’s strategist team produce a deep dive research report.

● A transparent implementation basket (Figure 18) is long a export-focused equity country exposures and short MSCI World, and we target the basket NAV to fall in value.

Figure 18: Accountable Implementation Basket with shorts in countries with the biggest exposure to exports, against an overweight in MSCI World.

● Finally, Analyst Conviction Level is mapped to a Credibility Rating (Figure 19).

Figure 19: Theme credibility rating

Is the theme attractively priced?

Although there’s plenty of noise in the financial media regarding tariffs and trade wars, this theme is only 11% “priced” by the market and this is mapped to a Pricing Rating (Figure 20).

Figure 20: Market Pricing Monitor.

Are Overall Return Prospects Aligned?

In this case, our overall (non-theme) ratings suggest multi-horizon Singapore/Hong Kong out-performance vs MSCI World, so this would be BAD for performance of the theme, and therefore the theme receives an Uninvestable rating.

Figure 21: Return headwinds/tailwinds?

Is the Theme Investable?

Yes, but only moderately.

Figure 22: TIC Rating.

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Figure 23: Thematics on the ClearMacro website. Multi-Cycle themes are mega/super-cycle trends that play on structural drivers of change.

We show all our live themes on the next two pages, drawn directly from the ClearENGINE.

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Figure 24: Cyclical - Returns typically dominated by two or three themes.

Figure 25: Within-cycle - Early/late and mid-cycle plays.