There used to be Sector funds, and now there are Thematic funds. Every week that goes by brings its new theme idea: Millenials, Disruption, Water, Aging Population, etc. Success has been phenomenal over the last few years but… what are the real benefits for each member of the food chain ?
For the portfolio manager, thematic investment is just a dream product because most themes are custom-made, and defined by very loose, subjective criteria. The investment universe is unlimited, since it is almost impossible to prove that a company doesn’t have any link with a given theme. It also eliminates any risk of looking ridiculous: when there is no benchmark and no competition in the exact same segment, the performance comparison cannot be unfavorable.
For the marketing team, thematic investment is an easy sell which can match the latest trendy concepts. No need to run lengthy research before the fund can be launched, nor develop a sophisticated speech to prove the superiority of the process. The customer’s decision is more likely to be driven by an emotional “fit” with the theme than by a deep analysis of its technical credibility.
For the investor, it’s more complicated. One of the main challenges is that the focus of thematic funds will, in essence, follow fashion trends. As a result, it will structurally be difficult to find, in the same period, all the thematic bricks needed to build a diversified portfolio with an effective risk management. Each period comes with its obsessions, which tend to shape its image in history, but they usually remain a marginal portion of what really drives the world. Ignoring the rest is just taking a big investment risk.
In conclusion, thematic management is great to make asset managers’ life less stressful with both performance and sales. As far as investors are concerned, it is a nice complement to core investments, but its success probably comes at the expense of portfolio balance and risk control. Very few chefs are able to cook a good dish with no ingredients but spices.
HG – May 10, 2021