As literal as it sounds, thematic investing is simply the strategy of investing in current trends. It is targeted at developing economic or corporate themes globally, such as fundamental shifts in technology, culture and the environment. Thematic investment approaches seek to capture the opportunities created by long-term structural trends affecting the economy, society, and the environment. As it takes a multidecade view, with these trends usually maturing over a longer time frame, it is well geared towards long-term liabilities.
Better known as “megatrends”, these major themes include clean energy, advanced technologies such as AI and robotics, sustainability issues such as water, the e-commerce economy, healthcare or emerging markets.
As explained by Pictet Asset Management, in the case of clean energy for example, it is more than just a function of the need for long-term sustainability in our energy markets—although that’s obviously a critical driving force as the world seeks to transit to a carbon-neutral future. It is also driven by a collective focus on health that crosses developing and developed market borders; the long arc of technological development that has seen the world transform digitally and materially across economic sectors; the increasing global connectedness and flow of people, capital, products, services, information, technology, and culture—which is commonly referred to as globalization; and it’s driven by long-term changes in the economy.
Thematic investing can help an investor build a powerful portfolio, particularly when it is actively managed. The investment can be customized according to an investor’s personal preferences and risk tolerance, allowing concentrated exposure to compact themes or events. When managed well, it is known to deliver much higher returns compared to mutual funds.
In April 2020, thematic funds reached €112 billion in asset under management. In Europe, the largest part of assets in thematic funds are managed actively, with Pictet Asset Management being the clear leader, managing 24% of the assets. Total assets in thematic exchange-traded funds (ETFs) were just under €7 billion in November 2018 with the five largest ETFs accounting for 73% of total thematic ETF assets.
Thematic equity baskets provide investors with the opportunity to digitally invest within a controlled environment. Wealth managers are able to select stocks to create baskets of funds that cater to specific investor niches (or themes/trends) encompassing a variety of asset types. Alternatively, wealth managers can also create a basket to offer a more diversified portfolio or focus on a specific market segment, such as consumables or blue chip. Thematic investments also allow brokerage or advisory customers to create passive baskets that enable investing into a theme or objective-based grouping of products.
Wael Salem, CEO at Tradesocio.