Thematic investing is a type of investment strategy where investment decisions are based on identifying and investing in companies likely to benefit from major long-term themes or trends in the global economy. Thematic investing is a forward-looking approach that seeks to identify and capitalise on the transformative or disruptive trends shaping the future.
Advantages and disadvantages of thematic investing
- Focused approach: Thematic investing allows investors to focus on specific industries or trends if they are confident about the future performance of those trends.
- Potential for higher returns: By investing in companies well-positioned to benefit from major trends, thematic investors may achieve higher returns than broad-based index investing. However, the returns of thematic investing can vary widely, and the returns of some thematic investments might underperform broad-based index investing.
- Higher risk: Thematic investing can be riskier than broad-based index investing as it requires more foresight about which themes and trends will shape the future.
- Lack of focus on fundamentals: Thematic investors may focus more on the potential for returns from the theme than traditional financial metrics such as earnings and revenue growth.
- Short-term performance: Thematic investing can be impacted more by short-term market fluctuations, which can result in significant changes in the value of investments over a relatively short period.
- Narrow investment focus: By focusing on specific themes or trends, thematic investors may miss out on investment opportunities in other areas. Their portfolios may become heavily concentrated in a few sectors or companies.
Examples of thematic investing
- Rapid urbanisation
- Climate change
- Aging population
- Cyber security
- Space exploration
- Cloud computing
- Artificial intelligence
- Environmental, Social, and Governance (ESG)
- Disruptive technologies in robotics, biotech, semiconductor, blockchain, etc.
The popularity of different themes can change over time and is influenced by several factors, including market conditions and investor sentiment. Additionally, new themes will emerge as the global economy evolves and as novel trends and technologies emerge.
History of thematic investing
The concept of thematic investing has been around for several decades, but its popularity has increased in recent years as investors have sought to capitalise on the significant trends and themes shaping the global economy.
The early days of thematic investing often involved actively managed portfolios of individual stocks that portfolio managers selected based on a particular theme or trend. Over time, this approach evolved to include exchange-traded funds (ETFs) and mutual funds, which provide more diversified exposure to a specific theme or trend.
Thematic investing has gained popularity in recent years as technology has advanced, and investors have become more focused on the long-term impact of major trends and themes. In addition, the growth of index-based investing, the growth of ETFs and the increased availability of data and research on specific themes and trends have also contributed to the adoption of thematic investing.
Over a while, many thematic benchmark indices are also launched. Almost all major product issuers offer thematic investment products now.
Today, thematic investing is a well-established investment approach used by a growing number of investors, from retail investors to large institutional investors. The range of thematic investment options available has expanded, allowing investors to choose from a wide range of themes and investment vehicles, including ETFs, mutual funds, and individual stocks.
It’s also worth noting that the size of the thematic investing market can be challenging to measure accurately, as many investment products that incorporate thematic elements may not be explicitly marketed as thematic investments.
Valuation of companies invested through thematic investing
The valuation of companies invested through thematic investing can vary. Some companies that are well-positioned to benefit from major trends or themes may have higher valuations compared to similar companies in other sectors, as investors seek to capitalise on the growth potential of that theme. However, this is not a universal characteristic of all companies invested in through thematic investing, and valuations can also be influenced by a range of other factors, including financial performance, market conditions, and investor sentiment.
Thematic investing requires a high degree of due diligence and a long-term investment horizon. It’s important for investors to understand the risks involved and to carefully consider their investment objectives before committing to a thematic investment strategy.
Reception of thematic investing among financial advisers
The reception of thematic investing among financial advisers is mixed. Some financial advisers view thematic investing as a useful investing strategy for helping clients achieve their investment goals, while others are more sceptical.
Our view at QuietGrowth
To know about our view at QuietGrowth regarding thematic investing, refer to the ‘Thematic portfolios‘ section in our Investment Methodology page.
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