What is the appeal of thematic investing?
What is the appeal of thematic investing?
Thematic funds focus on powerful, long-term global trends which are transforming the world and creating a wealth of investment opportunities. At Schroders we believe that the purpose of a thematic fund is to invest in powerful investment themes where human ingenuity ignites innovation to address imbalances in the world.
These imbalances could be between populations and resources such as climate change, a response to which is the energy transition theme. They could also be between supply and demand in individual industries where there is unmet demand or inefficient supply, the response to which is the disruption theme as innovators challenge the status quo.
These types of imbalances are often linked. The theme of healthcare innovation, for example, is a response to demographic imbalances as well as to supply inefficiencies within the healthcare industry itself.
Thematic funds, in our view, should therefore invest in those companies with the ingenuity to innovate and help address these imbalances.
We believe that an active, global and unconstrained investment approach is optimal for a thematic fund. If the themes are as powerful as we believe them to be, they must not be constrained by index weightings for stocks, sectors and even regions. In this way, we seek to identify and invest in those companies best able to grasp the opportunities in the powerful, long-term global themes we have identified.
How do you identify a theme?
Firstly, we consider whether the theme is driven by human ingenuity igniting innovation to address imbalances in the world. When we have identified potential themes we then assess them using a number of criteria:
- It is critical that they have longevity and so they need to be structural in nature rather than cyclical or short-lived fashions. In this respect, it is often very useful to look at what we call the ‘history of the future’ because many of the most powerful future themes are those which have driven innovations in the past. Indeed, since ancient times, human ingenuity has helped to transform the world and the way we live and work with innovations in areas like manufacturing, consumer behaviour, healthcare and entertainment.
- The themes also need to have valuation upside because we are investing in shares rather than in themes in the abstract.
- Finally, the themes we choose must also have a pool of stocks to select from that is neither too narrow nor too broad. If they are too narrow they deny the portfolio manager the flexibility to chart their way through evolving themes. If they are too broad they lack the precision which clients seek when they invest in a particular theme.
At Schroders, our Data Insights Unit of data scientists is critical in helping us build these investment universes. The team is invaluable in bringing to our attention fascinating companies exposed to our favoured themes which have not yet been fully recognised by the market.
In terms of popularity, themes which have particular resonance for us include climate change, urbanisation, disruption, energy transition, healthcare innovation, manufacturing innovation and changing lifestyles.
Why is thematic investing growing in popularity?
Thematic investing is increasingly attractive because it provides active long-term exposure to powerful and persistent themes that are transforming our planet and daily lives. This type of investing allows clients to invest with precision in trends which are important to them. Indeed, as clients’ intellectual and emotional connections to themes have strengthened, thematic funds are increasingly becoming a part of investors’ thinking.
Through such funds investors can gain exposure to those less well-known undervalued companies within long-term themes whose growth prospects are not yet recognised in their share prices.
Alongside this search for investment return, many thematic funds offer exposure to a number of themes with sustainability at their heart. Themes such as climate change, energy transition and healthcare innovation play a part in this respect. In any theme, it is imperative that companies have a sustainability mind set if they are to prosper in the long run.
As powerful as these themes are though, they do not operate in a vacuum. The returns made by thematic investments can be influenced by other variables such as the wider economic environment and the waxing and waning of particular investment styles within markets.
- Why digital infrastructure could emerge stronger from Covid-19
- Market behaviour, lessons from previous crises and what the future holds – a Q&A with fund managers
- Monthly markets review - July 2020
- Why investors should pay attention to sugar
- Why assessing sustainability is too important to outsource
- How China’s internet sector is leading the world
The views and opinions contained herein are those of the Authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested.
Schroders has expressed its own views in this document and these may change (to be used if the 1st statement above is not being used).
Issued by Schroder Investment Management (Europe) S.A., 5, rue Höhenhof, L-1736 Senningerberg, Luxembourg. Registered No. B 37.799. For your security, communications may be taped or monitored
The forecasts stated in the document are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.