Investors have different strategies at their disposal to express their investment thesis, with the use of a thematic investing approach gaining significant traction in recent decades.
Thematic investing is a forward-looking approach that aims to capitalise on emerging themes and predicted long-term trends rather than immediate market fluctuations or the fundamentals of individual companies.
In contrast to traditional investment strategies, such as sector investing or index tracking, thematic investing transcends ordinary market categorisations, typically spanning multiple industries and sectors that align with a particular theme.
These thematic investment strategies are typically expressed as a hybrid of traditional investment styles like growth, value or momentum strategies, offering a dynamic approach that investors can adapt in response to changing market conditions in their quest for long-term growth and diversification.
Thematic drivers
Several factors have supported the growing popularity and formalisation of thematic investing as a distinct investment strategy in recent years.
These include the pace and scale of technological advancements, which have created new investment opportunities and accelerated the pace of change across various industries.
Changes in global economic dynamics, such as the rise of emerging markets and ageing populations have also presented new thematic investment opportunities.
Thematic investing principles
Thematic investors invest across sectors or in specific companies based on broad trends or themes that they believe will disrupt industries, create new markets or reshape the world as we know it.
A popular thematic investment trend is an investment strategy that focuses on investing in companies that are at the forefront of technological innovation and disruption.
This trend is driven by the rapid pace of technological advancement in various areas, such as artificial intelligence (AI), automation, blockchain, biotech, fintech, machine learning (ML) and robotics, among others, and the transformative impact these technologies have on various industries and sectors.
Another prolific thematic strategy focuses on renewable or clean energy, with investments in electric vehicle (EV) manufacturers, battery metal providers and manufacturers, or renewable energy providers popular options.
Societal changes like remote work, digital transformation and e-commerce are additional themes that offer significant growth potential as these trends have and continue to transform existing industries.
Demographic shifts related to ageing populations and the emerging economically-active middle class are additional powerful forces shaping global economies and consumer behaviour, presenting significant investment opportunities across various sectors.
For example, catering to the ageing population in developed economies drives growth in the healthcare, pharmaceuticals, retirement housing and care, and senior living sectors due to rising demand.
The expansion of the global middle class, particularly in emerging markets, fuels consumer spending and economic growth, creating investment opportunities in sectors like consumer staples and consumer discretionary stocks, financial services, and infrastructure development.
Expressing your thematic view
There are various ways that an investor can express their thematic view. A common route into the market includes buying stocks in listed companies that are well-positioned to capitalise on an identified theme.
Investors can also gain broader exposure to a sector or trend via an exchange-traded fund (ETF). For example, certain ETFs provide exposure to a basket of technology stocks, offering diversification and professional management.
Considering thematic investing
While identifying and tracking themes requires careful research and analysis, selecting the right trend or theme can generate significant returns, especially those that align with long-term economic and societal shifts.
Themes such as renewable energy also allow investors to invest in companies or trends that align with their values and interests to contribute towards achieving societal goals they believe in while still generating financial returns.
However, this same attribute introduces risks to thematic investing, as themes can experience volatility as the trend gains traction in markets and it can be riskier than traditional investing due to its focus on long-term trends. Entering a trend too early can also result in loses.
Moreover, thematic investors often need to hold their investments for years or even decades to fully capitalise on the trend, which can result in opportunity costs with capital locked up.
As such, it is prudent to include thematic investing as part of a broader investment portfolio that offers exposure to other markets and strategies. Diversification within a theme is also an effective approach to managing risk.
Investors should also develop a clear exit strategy to bank profits and minimise potential losses. An exit strategy should be based on specific goals or indicators, such as achieving a target return or significant changes in the underlying factors driving the theme.
This disciplined approach will help investors make objective decisions and avoid emotional biases, which increases the potential to earn a profit or cut losses as necessary.
