Thematic investing has been around a long time but the appetite for funds seeking to make money from ‘big picture’ global trends has increased in recent years.
Simply put, thematic investing is a strategy that identifies changes believed to be disrupting established markets and industries – for example, artificial intelligence or electric vehicles.
Sustainable and climate-related themes have also attracted a lot of investor interest due to the money being piled into combating this global emergency.
Many investors believe that these themes have the potential to generate outsized market returns in the future.
Crystal ball gazing: Thematic investing is a strategy where investors identify global trends with the potential to disrupt existing industries and make them money
Some firms, like Newton Investment Management and Pictet, have embraced thematic investing as core to their approach as a result.
Last year Charles Schwab also launched thematic stock lists for investors who want to invest in companies aligned with their personal interests and values.
Jason Hollands, a director of Bestinvest, explains: ‘It is all about trying to identify major themes – sometimes referred to as megatrends – in society and the economy that will play out over the coming years and then trying to identify companies that stand to benefit.’
You would be forgiven for questioning whether thematic investing is just sector investing dressed up.
But investment firm BlackRock believes thematic funds and sector funds are very different propositions.
A BlackRock spokesperson says: ‘Themes are focused on structural growth or disruption and look to capture a one-off shift that will have a lasting impact on the current economic environment.
‘Sectors on the other hand are cyclical in nature with investment allocations often driven by short to medium-term views on the business cycle.
‘One rationale for investing in themes is to focus on groups of disruptive companies that are going to become much larger proportions of global equity markets in future.’
Hollands adds: ‘When you adopt a thematic mindset, it can make the process of investing quite exciting because rather than focusing solely on the nuts and bolts of profits, valuations and dividends, you are thinking about the really big picture stuff.’
What are the limitations of thematic investing
When adopting thematic investing as a strategy, effectively you are trying to look into a crystal ball and imagine what the world could look like over the coming decades.
But this presents difficulties as the future is unpredictable, and the world doesn’t always develop in the direction that is most widely expected.
Hollands says: ‘It wasn’t that long ago when the end of the Cold War was expected to usher in a peace dividend and the rise of globalisation seemed unstoppable.
‘Now we have Russia fighting a war in Europe, a deterioration in relations between the west and China, and the high point of globalisation has passed, with increased consideration of supply chain security.’
Some investment themes can also turn out to be passing fads and fizzle out.
Kenneth Lamont, senior analyst at Morningstar, says: ‘There is a risk that the theme won’t play out as you hope it will.
‘There are themes, such as 3D printing, which may yet go on to change our lives but haven’t played out quite as dramatically as we might have expected. Had we believed all the headlines we might already be expecting to print our own McDonalds burgers at home by now.’
Once a major theme gains recognition, it can sometimes mean a herd of investors stampeding to invest in it, with AI being a current example.
Hollands warns: ‘This can sometimes mean that thematic investors can become prone to being exposed to investment bubbles, where exuberance about the theme drives up valuations to extreme levels leading to an eventual burst. This isn’t always the case, but it is something to be careful about.’
Investors should also be wary of ‘themewashing’ when it comes to thematic investing.
In some cases, thematic funds end up being dominated by large tech giants who have small exposures to many themes.
Lamont says: ‘This raises very real concerns about themewashing – investors should not just be wowed by a strong narrative and really understand whether the fund offers adequate exposure to the desired theme.’
AI megatrend: There is a risk of investors being exposed to big theme bubbles which can burst
What are the ‘megatrends’ likely to dominate the future
Megatrends are the themes that investors identify as most likely to drive change on a global scale.
These can include aging populations causing shifting consumption patterns or a growing population requiring more efficient use of resources.
Bestinvest identified shifting demographics as one megatrend. Hollands says: ‘The global population has grown 80 per cent over the last 40 years and this is partly down to improved life expectancy, but the patterns differ significantly across countries.
‘For example, in Japan the median age is 48.6 years old and the population is declining, with China set to follow this trend as a result of its disastrous former “one child” per family policy.
‘Countries with ageing populations face economic challenges, but the investment opportunities include demand for healthcare, greater use of automation to address shortages of labour and increased demand for leisure to service growing numbers of retirees.’
The transition to a low carbon economy and away from fossil fuels is another megatrend. The journey to ‘Net Zero’ carbon emissions is shaking up demand for resources required for clean energy infrastructure and electric vehicles, such as copper, nickel, lithium, cobalt, graphite, and rare earth metals.
What funds can you invest in?
Aubrey Global Emerging Market Opportunities is one fund which focuses entirely on the theme of the rising power of emerging market consumers and their demand for goods and services.
Hollands says: ‘ETFs mean it is now increasingly possible to concentrate on very specifics themes, such as Artificial Intelligence (Legal & General Artificial Intelligence UCITS ETF), robotics (iShares Automation & Robotics UCITS ETF), or demand for metals important for future technologies like use in electric cars and smart phones (Global X Lithium & Battery Tech ETF).’
Fidelity’s flagship thematic fund is Global Thematic Opportunities, which invests in a range of themes including global demographics, technology, health care, climate solutions and clean energy.
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