Exchange-traded funds have transformed the investment landscape since their introduction, offering investors diversified exposure across various sectors and geographies.
Recently, a significant shift has been observed towards thematic investing: a strategy focusing on long-term trends and structural shifts in society and the economy. This approach contrasts with traditional sector-based investments, providing a lens to view potential growth areas through changing global dynamics.
Thematic investing delves into structural changes such as technological advances, demographic shifts, and evolving consumer behaviours.
Unlike conventional strategies confined by sectoral boundaries, thematic investing crosses sectors to identify companies poised for growth by aligning with global macro trends.
What is thematic investing?
Thematic investing focuses on structural changes emanating from the shifting global landscape of economics, demographics, technology, and psychographics, sometimes also regulatory mandates. These structural changes alter consumer and company behaviour and therefore spending.
That sea change in spending gives rise to thematic tailwinds that power the businesses of companies that have identified and positioned themselves to ride those tailwinds, either organically or through M&A.
Companies that capture incremental revenue, profits and cash flow stemming from these structural changes tend to be rewarded with expanding valuation multiples over time. In the lexicon of the investing world, thematic investing identifies the causality of alpha.
Often, sector-based classification incorrectly categorises a company’s business or finds itself becoming outdated, as new technologies, products and services come to market and disrupt existing business models.
Rather than a vertical, siloed approach, thematic investing is a horizontally focused strategy that cuts across sectors and geographies to identify companies that are best positioned to capitalise on long-term catalysts.
This approach enables investors to capitalise on long-term trends, sidestepping short-term market volatility and obsolete sector classifications and illustrating thematic investing's depth.
By identifying companies poised to benefit from evolving thematic tailwinds, investors can take advantage of opportunities while sidestepping the risks associated with companies whose business models are being impacted by thematic headwinds.
Benefits of thematic investing for advisers
Thematic investing allows advisers to focus on the structural changes or themes that will play out over the longer-term, shaping and altering competitive landscapes, but also to look past short-term market or sector noise and uncertainties.
Themes have three defining characteristics that make them appealing to the financial advisers serving retail investors:
- They offer recognisable signals that make them digestible and relatable to investors and helps them to make investing decisions based on things they know and can observe.
- They can help insulate a client’s overall investment portfolio, as they sidestep investments in funds and companies that are vulnerable to the changing landscapes ahead of them.
- The combination of multiple themes blowing on a company’s business, compared to a lone one, allows well-positioned companies to capture incremental revenue and profits at an even faster rate.
Biggest investment themes
Thematic ETFs have become increasingly popular over the past decade, marked by a growing interest in specialised investment themes, particularly in areas like sustainability and technology.
This shift towards thematic investing reflects a deeper engagement from investors who are looking to align their investments with their values, interests or forecasts for future industry growth.
From 2016 to 2022, the global ETF market experienced a robust growth rate of 16 per cent a year, far outpacing the growth of traditional mutual funds. This expansion has been particularly notable in the thematic and active ETF segments, first in the US and then increasingly in Europe.
