In today’s challenging economic environment, market participants are most focused and determined to align future expectations with their portfolios. In an attempt to seek out absolute-return target values, the focus has switched to “thematic” investment strategies.
Thematic investing is a top-down investment approach with a focus on broader, macroeconomic themes. It works at one of the investors’ great advantages, the long-term investment horizon, serving as a forward-looking approach that serves to capitalize on anticipated changes in our world.
Thematic investing follows certain social, economic, corporate, demographic, or other themes that are popular in society. Essentially, the opportunity comes when more people believe in the same themes and capital is shifted in the direction of these companies, driving superior performance in a thematic portfolio.
What are the benefits of thematic investment?
Thematic investing requires a fundamental understanding of the impact of long-term economic, political, and social trends on regions and sectors, which reveals investable opportunities. This is a big change from the traditional relative strategies, and it can yield many benefits.
One of the key strengths of thematic investing is that it is far more concentrated when compared with regular or passive fund strategies. Mutual funds are usually comprised of 40–80 stocks in a portfolio. Thematic investing, on the other hand, focuses on a much smaller selection of stocks to capitalize on the full potential of a future growth trend.
Second, it provides investors with a dynamic and flexible way to validate and express their distinctive investment insights by applying the forward-looking approach to investment decisions. Strategic asset allocation, on the other hand, is backward-looking and fails to incorporate emerging trends and forward-looking perspectives on the economy.
Third, thematic investing requires a more systematic investment process and in-depth research, which in turn builds a deeper understanding of the underlying drivers of value creation and risk; investors can then use this knowledge in a plethora of investing strategies.
Ben Willis, investment manager and head of research at Whitechurch Securities, points out several well-known thematic trends that have become commonplace over the years, including developing and emerging market wealth creation, clean energy, natural resource scarcity, climate change, and disruptive technology.
How the new generation grew the trend of thematic investment
Millennials are transforming numerous industries by demanding things like clean energy, streaming entertainment and more relaxed dress codes.
Getting ahead, they are also changing the investing industry. They are twice as interested in ESG (environmental, social, and governance) investing, compared to their boomer counterparts. In fact, most millennials (66%) choose funds according to ESG considerations.
In terms of investment knowledge, 42% of millennials considered themselves to be experts in the field. On the same question, only 23% of boomers could say the same. This research on the knowledge and abilities of the new generation just goes to show that a continuous shift to thematic investing is a much-expected reality (Source of research: www.raconteur.net).
When it comes to gaining exposure to themes and high-growth industries, such as gaming and cannabis millennials normally invest through exchange-traded funds (ETFs).
What about today’s thematic investment?
Some of today’s common investment themes focus on information technology, social media, climate change, social security or technological progress. Investors following a thematic approach would select funds that mirror these themes.
These are some notable examples of thematic investment strategies that may have long-term viability and growth potential.
Selecting a few companies involved in the Internet of Things, blockchain or renewable energy, for example, could yield huge results should those industries develop as expected.
The legalization of recreational cannabis in Canada and several U.S. states has also put marijuana ETFs on the fast-track to exponential growth. In fact, a study conducted by XTB shows the world cannabis market as valued at more than 340,000 million dollars. Indexes like the BITA Global Cannabis Giants Index include large companies active in the newest and most rapidly growing industry.
Index providers like BITA have taken a focus on the development of professional-grade thematic strategies, using scientific research and technology to identify concentrated exposures across themes, such as global infrastructure, women in leadership and more.
The ability to accurately classify assets across a plethora of themes and trends is becoming crucial, as a thematic strategy is coherent only if the investor is able to effectively gain pure exposure. BITA has put in place a dedicated team of researchers and IT developers to accurately map out this exposure in an objective manner.
Thoughts
There’s a saying in investing, “time in the market is better than timing the market.” What this means is that it’s better to invest over a long period of time, rather than trying to pick low points and sell at high points.
Thematic investing allows the focus of financial markets to incorporate emerging trends and forward-looking perspectives on the economy, which will ultimately amount to a deeper understanding of value creation and achieving a superior rate of returns.
Author: Oana Barabula
Additional sources of information: FTadviser.com, ETFdb.com, McKinsey.com
