Thematic investing has garnered increased interest across the institutional and retail investor space in recent years. According to data compiled by Morningstar, collective assets under management over the last three years have grown threefold – from $75 billion to approximately $195 billion worldwide at the end of 2019. The number of funds available to investors has also grown substantially, with 154 thematic funds being launched in 2019 alone – bringing the total to 923.
This marks an incredible rise in popularity of thematic funds, which now represent approximately 1% of global equity fund assets – up from 0.1% ten years ago.
So, what is thematic investing?
Thematic investing revolves around attempting to capitalise on real life trends; whether this be areas such as health, climate change or rapid urbanisation, identifying investment opportunities set to benefit from these themes can be key to driving long-term positive returns.
In a world where a lot of investment decisions are made based on past experiences or historical data, thematic investing provides something different. It is forward thinking. It’s about looking ahead at how we are going to meet our resource needs in the future or how we are going to care for an ageing global population – and as a result how we can invest to ensure those needs are met.
What does it aim to achieve?
Investing thematically provides a powerful interaction between innovation, ingenuity and imbalances which creates sustainable, persistent and long-term investment themes. Investing in these themes is not only about trying to ride the wave of transformation; it’s also about changing the world we live in for the better.
For example, the International Renewable Energy Agency (IRENA) estimate $110 trillion worth of investment will need to be invested by 2050 in order to fully achieve energy transition. This will open up a range of opportunities for companies involved in areas such as: clean energy generation, energy storage, electric transport infrastructure and smart meters to name a few.
It’s these kinds of trends which investment managers and other organisations are seeking to invest in – not only for capital protection in an ever-changing world, but also for long-term structural growth.
How does it differ from conventional sector-based investing?
Thematic investing is agnostic. It ignores traditional sector classifications, style biases, market capitalisations and geographical locations. Instead it looks across all of these to find the best ideas suited to a theme. As a result, thematic investments can have low correlations to other investments and can be useful for investors looking to diversify their sources of investment growth.
Sectors have been relatively constant over time. There have been few changes and traditional sectors tend to support the winners of yesterday, increasing exposure to the companies who have already capitalised on a specific theme – such as Apple almost monopolising the mobile device industry, particularly in the US.
However, as the powerful themes like those mentioned previously begin to accelerate, new companies will potentially rise to the top of each sector. Thematic investing is about identifying those companies who will be beneficiaries of structural changes or are well placed to be a step ahead of the status quo in delivering the products or services of tomorrow.
Different sectors will be popular at different times in the economic cycle and require investors to be on the ball and potentially have to shift their allocations but investing in themes will encourage investors to take a long-term view when deploying their capital. If it’s something they strongly believe will still be prevalent in 20 years, then it’s most likely worth investing in.
Why go thematic now?
The current coronavirus crisis, while still ongoing, has certainly pulled back the curtain on some of the fragilities and social inequalities within societies. It has revealed our healthcare systems are ill-equipped and many businesses lack the flexibility and adaptability to cope with systemic shocks. This opens up an opportunity for policymakers to make a fresh start and collaborate by investing more in important public services and to help markets recover through the promotion of clean energy and innovative technologies.
However, regardless of whether governments act positively or not, corporations and investors who aspire to creating long term success are likely to increase their sustainability efforts.
Decarbonisation and digitalisation are becoming dominant themes for survival and future growth, as such an increasing number of businesses are becoming more willing to exercise corporate stewardship and become better, more resilient versions of themselves. Some of the trends at present are irreversible and global in scope; they are a huge opportunity for investors.
Tom Rosser, investment research analyst at The Share Centre