In focus

How institutional investors can allocate to thematic investments


Thematic investing has grown in popularity over the last few years among retail investors. Now, some sophisticated institutional investors have started considering them too.

Here, we look at how thematic investments might make sense for all, especially when considered in the context of the wider portfolio.

We have found that for an institutional investor managing across multiple asset classes:

  • The global economy is facing a set of disruptive changes, resulting in thematic investing being an important additional way to generate alpha, particularly in a low interest rate environment.
  • Thematic ideas can overlap each other in terms of the risks to which they are exposed (especially the exposure to the growth factor), and also to the existing portfolio. Institutional investors may need to consider how to adjust their existing portfolio (if appropriate) to ensure risks are being taken where intended.
  • However, we believe that it is currently inappropriate to set a strategic asset allocation using themes rather than a traditional approach.
  • Good governance is crucial. For many institutional investors, this will be the most difficult part of deciding whether to include themes in their approach.

What is thematic investing?

Thematic investing focuses on macroeconomic trends that are transforming the world, such as population aging, energy transition, automation and feeding the world. Many of which we identified in our ‘Inescapable truths for the decade ahead’.

Transformative macroeconomic trends are not new – the introduction of the railways and electricity are obvious examples from the past. But thematic investing allows more focus on these trends and it extends or replaces the traditional geographical, sectoral and asset class approach to investing.

Themes can relate to imbalances between people and planet, such as climate change where the energy transition is the response. Or they may relate to imbalances between supply and demand in individual markets, where disruptors can appear and transform an entire industry by displacing long-established incumbents. Or alternatively an entire industry can benefit from disruptive innovation without any change in market leadership.

Themes generally play out over multiple years, as evidenced by the ‘transition to cleaner energy’ theme to meet the carbon reduction goals of the Paris Agreement. This makes thematic investing arguably more suitable for institutional investors with their generally longer-term time horizon than retail investors. That’s as long as the theme(s) is identified at the right time (more on this later) and held for the long term.

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