To create a successful thematic index, wealth managers and investors must take a systematic approach to thematic investing. They start by identifying a theme that shows excellent growth potential. They then build a clear and precise expression of this theme to capture all the associated trends. Next, they search for specific business activities that incorporate the targeted themes. Finally, they map products and services linked to the theme.
These three steps form the modelling stage of the theme development. They then calculate the level to which the companies identified in the second step are exposed to the theme. These calculations yield a relevance score indicating the relative importance of individual companies in terms of the theme. Finally, investment portfolios are constructed, with fund managers selecting and weighting stocks based on the relevance scores calculated in the previous step. Let’s take a look at each of these steps in more detail.
Identifying the right trends
The investor first has to identify the trend that will form the heart of the investment theme. What are the trendsetters doing? Is there a future in the trends they are setting and or following? Once a trend is identified, the investor must study it a little further and determine whether the trend is structural and has long-term implications and is really likely to disrupt industries and economies.
Identifying the sectors
Once the trends have been identified and analyzed correctly, the next step is to pick out the sectors that will be most affected by them. Again, sectoral allocation of funds is essential to predict the exposure of certain companies accurately.
The next step is to dive into the sectors and pick out the companies set to have maximum exposure to the trend. This helps the investor to allocate stocks correctly as they build up their portfolios.
Nour Private Wealth (NPW) Wealth Advisors are experienced with knowledge spanning all fields of global investment and the various approaches to it. For more information on Thematic Investing, how it can help you grow your wealth, or any questions regarding the protection and expansion of your wealth, contact us at 1.855.545.9090 or by clicking the following link: https://www.npw.ca/contact-us/.