The Rewards of Reshoring: the CIO of Tema ETFs Joins OPTO Sessions

Yuri Khodjamirian, Chief Investment Officer at Tema ETFs, joins OPTO Sessions to discuss the reshoring trend, its historical context and drivers, and why he feels that it will benefit the US manufacturing companies that adopt it. He shares insight into how Tema’s American Reshoring ETF captures hidden gems within the trend.

Yuri Khodjamirian is the Chief Investment Officer at Tema ETFs. He previously spent over a decade at Majedie Asset Management, managing the firm’s UK and global portfolios. He helped build the firm’s UK Income Fund from the start-up stage to holding several billion pounds in assets. He also started his own long-only fund focused on business transitions, and advises start-ups in the financial and biotechnology sectors.

He earned his bachelor’s degree in economics from the University of Cambridge, as well as two master’s degrees: one in economics from the London School of Economics and Political Science and one in bioscience enterprise from the University of Cambridge.

He is a firm believer that the reshoring trend offers benefits to companies that adopt it over the long term. These include superior revenue and margin growth.

Reshoring in Context

“If we go back to the 1960s,” says Khodjamirian, “a lot of American industrial companies started to offshore their manufacturing production.” This process — offshoring — was a significant development, given the prevalence of manufacturing in the US economy at the time. Khodjamirian suggests that it was approximately 27% of the country’s economy as a percentage of GDP.

Low labor costs in places like China promised a significant cost-saving for these companies. The trend was then accelerated by the interrelated forces of globalization and trade liberalization.

However, explains Khodjamirian, “what’s been happening under the surface for the last 15 years or so is the world has faced a series of risks, problems and challenges that have started to strain supply chains.”

These strains are driving a counter-trend whereby companies are moving their operations closer to their home markets, particularly the US. Moving closer to a given market in this way is called nearshoring, while a related trend sees companies moving to countries that, while geographically distant, may have closer geopolitical ties to their home market. This is known as friendshoring.

Finally, there is reshoring — moving manufacturing back to within the home market itself. Reshoring and its related trends have been driven by deglobalization forces, the Covid-19 pandemic, government policy and the rise in geopolitical tensions between China and the US, says Khodjamirian.

The pandemic’s influence was substantial in that it severely disrupted the global supply chains that underpinned offshoring, and Khodjamirian explains that it made company boards more alert to the inherent risks of globalization.

The Rewards of De-Risking

However, the trend isn’t driven solely by the avoidance of risk. There are also key economic advantages to reshoring.

“You can respond faster to demand, you can reduce the carbon footprint of shipping all these goods across the world, you can reduce your inventories, you can manage your operations, and you can build manufacturing that’s more future-proof,” says Khodjamirian.

Advances in automation technologies that can boost manufacturing output are also undercutting the cost advantages of offshoring. With fewer people in a production line, there is less of an advantage in basing operations in countries where labor is cheap.

Implicitly, these advantages mean that reshoring companies should, over time, gain performance advantages over their counterparts based on improved revenue growth and profit margins. Once the team at Tema realized this, it followed logically that they should create a product to capture the megatrend.

The RSHO Must Go On

The result is the Tema American Reshoring ETF [RSHO], born from a conviction that reshoring would deliver superior growth rates and profit margins for the companies embracing it.

“The question is, of course, what is a reshoring company?”

This is hard to quantify objectively — and, as a result, difficult to screen for, even using modern artificial intelligence tools.

However, Tema has identified three buckets of reshoring companies.

First, there are reshoring manufacturers: those bringing manufacturing back to the US.

Second, there are reshoring facilitators: those that are supporting the rebuilding of the US’ manufacturing base.

Third, there are the beneficiaries of reshoring: those that are recognizing increased revenue thanks to increased levels of industrial activity in the US. For example, a hazardous waste management company, like Clean Harbors [CLH], benefits if there is more hazardous waste to remove within the US.

RSHO focuses on mid-cap companies — those with a market capitalization between $2bn and $10bn — and large-cap companies  — with a $10bn–200bn market cap. These made up 36.43% and 57.67% of the fund’s holdings, respectively, as of June 30.

“We’re looking for those under-the-radar reshoring winners,” says Khodjamirian. Clean Harbors is the fund’s second-largest holding as of September 4, with a 4.95% weighting, but, as Khodjamirian acknowledges, it isn’t a household name: “It’s a company that requires a lot of work to identify and then to analyze and look at.”

Khodjamirian credits the fund’s lead fund manager Chris Semenuk for the industry expertise required to identify these kinds of companies.

He adds that the wider team conducts thorough research to ensure that portfolio companies are true to their commitments to reshoring. In this respect, he says, it is key that the fund is actively managed, as this hands-on knowledge is brought to the fore.

There are, he says, risks in investing in reshoring — among them the inherent cyclical risks of industrial companies, and the potential for a global backlash against US reshoring.

However, Khodjamirian is impressed with RSHO’s performance. Since launching in May 2023, the fund has gained 42.68%.