Thematic Investing: Thematically Wrong?

Performance Chasing with a Narrative

March 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Thematic investing can be viewed as performance chasing with a narrative
  • A systematic approach to thematic investing would have underperformed the stock market
  • Thematic hedge fund managers have not generated attractive returns

PERFORMANCE CHASING WITH A NARRATIVE?

Thematic investing is like venture capital for asset managers. For every 10 products launched, most fail to generate interest from investors, a couple break even from a cost perspective, and maybe one becomes the star fund that raises billions of assets under management and makes it all worthwhile.

For example, the first cybersecurity-focused exchange-traded fund (ETF) – HACK – paid off for its manager when governments and corporations around the globe were attacked by hackers in June 2017.

Themes are typically about change: perhaps a country evolving from a frontier to an emerging market, a sector undergoing a dramatic transformation, or a new technology seeing widespread adoption. Of course, most investors are only interested in themes that generate enviable returns. Thematic investing isn’t just performance chasing, it’s performance chasing with a narrative. That can be a seductive combination.

So should investors consider thematic investing?

SELECTED THEMATIC INVESTMENTS

Although there’s no standard definition, thematic investing tends to be about capturing the zeitgeist. Or trying to. The big themes of recent years have included factor investing; environmental, social, and governance (ESG) and low carbon investing; the rise of China; and new technologies like artificial intelligence (AI) (read ESG vs Low Carbon Investing).

New themes appear all the time, but many are quickly forgotten, especially those that disappointed investors.

Some themes have a near-universal appeal, while others are more eclectic. Internet stocks were all the rage in 2000, but far fewer investors got into bitcoin and other cryptocurrencies in 2017 or marijuana stocks in 2018. In hindsight, themes can often resemble financial bubbles.