Thematic Investing Guide
In a world of unstable interest rates, volatile investment markets, and rapid change, many investors have begun to question traditional approaches to investment management.
Traditional forms of investment management, which utilise benchmarks, can be rather inflexible and also quite backward-looking, and as a result, can lead investors in the wrong direction at times.
For this reason, many investors are turning to more flexible ‘thematic’ investing strategies, which are forward-thinking in nature and aim to profit from dominant long-term trends across the world.
So, what exactly is thematic investing and what are its benefits and drawbacks?
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Thematic Investing
Broadly speaking, thematic investing is an investment strategy that aims to identify, and profit from long-term trends that are shaping the world.
The world in which we live is dynamic and constantly changing, and thematic investing is designed to capitalise on these changes, and generate increased investment returns.
Focusing less on benchmarks and more on big-picture ideas, the strategy offers a unique approach to investment management.
Traditional benchmark approaches to investing are based on the process of either adhering to, or deviating from a benchmark in order to enhance returns or limit downside risk.
While this approach has been widely accepted within the investment management industry, the problem with this style of portfolio management is that it tends to be quite rigid in nature.
In contrast, thematic investing offers a more flexible approach to investment management. The strategy is more forward-thinking as it seeks to anticipate new ‘Giga-trends’ in many themes, embrace change and take advantage of any future growth opportunities.
There can be significant overlap between key themes, and the most profitable ideas often require multiple themes to emerge simultaneously. For example, the world’s ageing population is linked to the increasing interest in health and wellness across the world. Similarly, robotics is closely linked to other areas of technology, such as artificial intelligence (AI). So, it can pay to focus on interconnected ideas when following a thematic approach.
The Thematic Investing Process
The beauty of thematic investing is that, at its core, it’s quite a simple approach to investment management.
The first step in the thematic investing process involves identifying long-term ‘secular’ trends and translating these into investment themes.
For example, one such trend that we often hear about is the ageing population across the world. Over the last half century, life expectancy at birth has increased by almost 20 years, and the number of elderly people across the world has increased significantly. Another dominant trend is the increase in wealth across the world’s emerging markets.
As a whole, emerging markets are growing at around twice the pace of the world’s developed countries, and in the coming decades, we are going to see millions of people across these regions enter the world’s middle class.
Once a number of powerful themes have been identified, the next steps in the thematic investing process are simply identifying and analysing companies that look set to benefit from these themes, and then constructing a portfolio.
By understanding the investment opportunities associated with dominant global themes, investors can increase their chances of generating better returns over the long term.
How to create a thematically driven portfolio
- Identify emerging trends that could shape the future. Investors must recognise both trends and trendsetters to uncover potentially profitable opportunities. Our top 5 investment theme guide provides ideas to explore.
- Focus on prominent and accessible industry sectors that align with your investment strategy.
- Profile companies that you trust in and believe may fit your long-term growth objectives.
- Remain flexible and adaptable. Modify and adjust your portfolio as trends evolve and businesses make strategic decisions—both positive and negative.
- Patience is key. Thematic investing is a long-term approach that has the potential to generate better returns over time, but it requires discipline and perseverance. Positive outcomes rarely happen overnight.
The Advantages of Thematic Investing
Thematic investing has many desirable benefits.
Here is a look at four key advantages:
Capital Growth
Naturally, as a strategy that aims to profit from the success stories of tomorrow, thematic investing offers investors the potential for long-term capital growth. When executed properly, investors can profit from disruptive technology, changing consumer behaviour patterns, and long-term demographic shifts.
Intuitive Approach
Thematic investing is also a strategy that is very easy to understand. It enables investors to put their money into areas that interest them and this can make investing considerably more relatable.
Long-term Focus
The long-term nature of thematic investing is also beneficial as it can help investors ignore short-term market movements and stick to their trusted investment strategies.
Diversification
Moreover, thematic investing can offer diversification benefits. That’s because often, thematic portfolios have low correlations to traditional equity portfolios and benchmark indexes such as the FTSE All-Share index or the S&P 500 index. As a result, thematic portfolios can help hedge other portfolio risks and reduce overall portfolio risk.
One particular way the approach can help diversify a portfolio is by enhancing geographical diversification. The primary goal of thematic investing is to invest in companies that will benefit from long-term structural growth opportunities. Where those companies are based or listed is of less importance. With less geographical restrictions than a traditional benchmark-oriented portfolio, a thematic portfolio is likely to have exposure to a broad range of economies, both developed and developing, and this can provide valuable diversification benefits during periods of market stress.
The Risks of Thematic Investing
Of course, like any investment strategy, thematic investing is not perfect and does have its drawbacks. For example, investors need to be aware that thematic investing is a long-term strategy that can take time to play out. It requires patience and discipline and is therefore unlikely to suit those with shorter-term investment time horizons.
It’s also worth noting that thematic investment portfolios can underperform global equity indices at times. As such, the strategy may not be suitable for those who are unable to tolerate deviations from mainstream equity benchmarks.
However, overall, thematic investing is a strategy that can suit a variety of investors and offer a number of benefits. A forward-thinking approach that embraces change and focuses on big-picture ideas, it is highly suited to today’s rapidly-changing world and complex financial markets.
Interested in incorporating thematic investing strategies into your portfolio?
Our experienced investment managers can help. We stay on top of major global trends and identify companies well-positioned for long-term growth. By taking a flexible, forward-thinking approach, we aim to maximise gains while minimising risk. Book a call now to discuss how thematic investing could benefit your financial objectives.
Key Points
- Thematic investing focuses on long-term trends, like aging populations or rising wealth in developing countries.
- Benefits:
- Capital Growth: Profit from disruptive tech, changing consumer behavior, and demographics.
- Intuitive Approach: Invest in areas you understand and find interesting.
- Long-Term Focus: Avoid short-term market noise and stick to your plan.
- Diversification: Spread investments across themes and regions to reduce risk.
- Drawbacks:
- Long-Term Strategy: Takes time to see results, requires patience.
- Not Always a Winner: Sometimes trends fizzle, so be prepared.
Regulatory Information
This communication does not constitute tax or financial advice. All information is accurate at the time of writing. The value of investments can go down as well as up. Capital is at risk. Featherstone is a trading name of Featherstone Partners Limited, Old Brewhouse, Yattendon, Berkshire, RG18 0UE, which is authorised and regulated by the Financial Conduct Authority (799741) and registered in England (Company Number 11039522).
Our Approach
At Featherstone Partners, we aim to provide our clients with access to high-quality, expert and niche investment funds that few private clients typically couldn’t access.
We believe that a portfolio consisting of various specialist fund managers based around the world, and focused on specific themes, is likely to outperform the generalist approach to wealth management which is often observed within the investment management industry.
Our clients enjoy the qualities of a smaller, friendlier firm, while benefiting from our team’s experience working at firms such as Goldman Sachs, UBS, GAM, Ruffer and Close Brothers. Aligning our interests with those of our clients, we invest alongside our clients and our founders, staff, families and friends are among our largest (and smallest) investors.