March 30, 2020
What is thematic investing?
“Thematic investing is a form of investment which aims to identify macro-level trends, and the underlying investments that stand to benefit from the materialisation of those trends.
The Financial Times describes thematic investing as a broad term with a meaning which can differ depending on the audience. Frances Hudson, strategist for multi-asset investing at Standard Life Investments, says: “It tends to be global [and] it can be multi-asset, although within wealth management it is primarily equities. The manager will pick things they think are important, so it might be the emergence of emerging markets, something changing about technology, or an aspect of the environment, such as water shortages.
Thematic investing involves creating a portfolio (or portion of a portfolio) by gathering together a collection of companies involved in certain areas that you predict will generate above-market returns over the long term. Themes can be based on a concept such as ageing populations or a sub-sector such as robotics.
Usually, mutual funds have between 40-80 stocks in a portfolio and because of the high diversification in investments, returns are often much lower than the potential. In thematic investing, in contrast, usually fewer stocks are selected for the portfolio, more focused on a key area. If that area performs well, returns will be much higher than what mutual funds typically deliver.
Fidelity Investments describes thematic investing as controversial, claiming that advocates say it is an effective strategy because it “concentrates securities in an idea that is still misunderstood and underappreciated in the marketplace. Those companies involved in the theme will exhibit better-than-average returns as more investors realize their potential and money is moved into that sector”, while suggesting that critics see these types of strategies as “marketing ploys designed to attract fast money from the public rather than as viable long-term investments. Those critics say the funds harm investors by encouraging them to chase the latest fad, usually too late.”