What is “Thematic Investing”?

Thematic investing is an investment strategy that aims to predict long-term macroeconomic trends that have the potential to change an entire industry, instead of specific companies.

Although similar to sector investing, thematic may focus on a variety of sectors and select underlying companies that are related to a particular theme. For example, a health care fund could invest across multiple industries such as pharmaceuticals, hospitals, or health science, should they focus on a specific theme such as the aging population. The main objective of this approach is to deliver a rate of return in excess of the market, but it would typically fit investors with a longer-term investment horizon.

Key Learning Points

  • Thematic investing aims to capture long-term systematic trends that have the power to change entire industries.
  • These shifts shape and have an impact on consumer behavior, therefore companies are forced to make fundamental changes to their business model.
  • This approach could include companies from various sectors that can benefit from a particular theme, for example, the adoption of 5G technology could impact businesses operating within telecoms, manufacturing, technology, and many others.
  • Some of the most popular megatrends (themes) include shifts in economic power and demographics, climate change and energy transition, technological advancement, urbanization, and social changes.

The Basics of Thematic Investing

The main philosophy of thematic investing relies on the human ability to solve complex issues through creativity and innovation. While this can help solve imbalances in the world, it also offers an opportunity to participate in a sustainable long-term growth trend, which has not been reflected in asset prices yet. The transition towards clean and sustainable energy is a good example – it requires a massive amount of funds, estimated at around $120 trillion to be invested until 2050 across multiple sectors and industries including energy generation, electric transport infrastructure, and power distribution. This global shift will create a huge number of opportunities that investors can exploit.

Innovation is also playing an essential part in thematic investing. New ventures and ideas constantly challenge existing well-established industries and market players through the development of new disruptive new technologies. For example, the research and development of new drugs can be a long-term disruptor in the pharmaceutical and healthcare sectors.

What Are the Risks?

Many investors feel tempted to participate in thematic investing considering the ongoing technological advancement that reshapes the world. However, while some trends turn out to be successful investments over time, many others struggle to deliver. This is where it is essential for investors to distinguish between market speculation, which could occur during periods of market stress or recessions, and long-term market shifts. Some of the features that a healthy company participating in these trends should demonstrate are the strong earnings potential and the ability to gain and retain reasonable market share.

There have been many structural changes in the global economy over the past few decades that offered excellent growth opportunities, but as themes evolve over time, it is essential that investors make their own judgments and potentially allocate a smaller portion of their portfolio towards a particular theme.