Global thematic investing is a complex and daunting endeavor for many individuals. The intricacies of determining where to invest, what to invest in, and how to invest can discourage potential investors from even beginning. Sector investing is a common approach that many investors, investment funds, and wealth managers use, focusing on specific sectors such as utilities or healthcare.
Some investors prefer to focus on particular asset classes: Large Growth Stocks, Small Value Stocks, International Stocks, High Yield Bonds, and so on. Thematic investing is a different approach. Global thematic investing is recommended by many wealth managers as an effective solution for profitable investments. In this article, Nour Private Wealth (NPW) focuses on global thematic investing, providing all the essential facts you need to know as you consider this particular form of investment.
Investing in the future: What is Global Thematic investing?
Global thematic investing is a strategy of investing in global equities or other assets based on emerging trends, with the aim of achieving higher returns than traditional investment strategies. Thematic investing has some similarities to sector investing. Both approaches offer targeted exposure to carefully selected areas of the market. However, in thematic investing, rather than focusing on sectors, investors study themes and trends across various sectors and asset classes. The aim is to understand these trends and try to predict how they will move in the future and use this knowledge to drive investment.
Thematic investment specialists analyze long-term economic, political, social, and technological trends to inform their investment decisions. Global thematic investment is sector independent, cutting across national boundaries and traditional sectors. After identifying a particular theme, a fund manager will choose companies and assets based on their exposure to or involvement with the themes in question.
How Global Thematic Investing Works:
Global thematic investing works by identifying emerging trends in the global market and investing in companies or sectors that are likely to benefit from those trends. Thematic investors identify key themes that are expected to drive growth in the global economy, such as demographic changes, technology advancements, environmental changes, and shifts in consumer preferences. They then build portfolios of global stocks or other assets that have exposure to those themes. They monitor the trends and adjust their portfolios as needed.
Benefits of Global Thematic Investing:
- Diversification: Global thematic investing provides diversification across multiple themes, sectors, and geographies, which can help to reduce risk.
- Exposure to High-Growth Trends: Global thematic investing provides exposure to emerging global trends that are expected to drive growth in the global economy.
- Investing in Companies with Strong Growth Potential: Global thematic investing provides opportunities to invest in companies that have strong growth potential, which can potentially result in higher returns.
Risks of Global Thematic Investing:
- Risks of Investing in Specific Themes or Trends: Investing in specific themes or trends can be risky as these themes may not always perform as expected, and may be vulnerable to shifts in the economy or other unexpected events
- Currency Risk: Investing in global stocks can expose investors to currency risk, which can affect returns.
- Regulatory Risk: Global thematic investing can be subject to regulatory changes that can have an impact on the companies or sectors that are being invested in.
Strategies for Global Thematic Investing:
- Investing in Individual Companies or Sectors Related to a Global Theme: Investors can identify specific companies or sectors that are expected to benefit from a specific theme and invest in them.
- Investing in Global ETFs that Track a Specific Theme: Investors can invest in global ETFs that track a specific theme, providing exposure to a diversified set of global stocks related to that theme.
- Investing in Mutual Funds or Actively Managed Funds that Focus on Global Themes: Investors can invest in mutual funds or actively managed funds that focus on specific global themes, providing diversification and professional management.
What are the benefits of thematic investing?
With thematic investing, one can invest in long-term trends and themes of particular interest. They are more concentrated than asset class or sector-based investing, allowing investors to focus closely on the desired exposure. While factor investing is historically based, with investors analyzing past trends to make their decisions, thematic investing is more forward-looking. It aims to capitalize on developing social, political and economic trends, with investors always looking to the future to predict where these trends will take them and their money.
The thematic approach to investing also helps investors to be more patient. People want to get returns as quickly as they can, and with sectors and asset classes, they may tend to anticipate growth too quickly, without understanding that investment is a long-term game. With thematic investing, this understanding is built in from the start. People know that they are dealing with the long-term trajectories of economic, social, and political trends and accept that they need to settle in for the long haul and let the themes develop and unfold.
The three main benefits of thematic investing can be summed up as follows:
- Gives investors exposure to long-term structural trends.
- Positions portfolios relative to long-term risks and stranded business models.
- Provides exposure to several themes that can be quantified, analyzed, and managed.
If you’re interested in learning more about the benefits of thematic investing, check out this article on What are the benefits of Thematic Investing?
How to identify a winning Megatrend
When working to create a successful thematic index, fund managers research Megatrends with the following characteristics:
- Long-term structural (economic, social, political) trends that have strong potential to transform global economies.
- Sectors and areas of high innovation with the potential to disrupt industries and the economy as a whole.
- Clear, significant growth potential.
- Trends that are increasingly important drivers of earnings for companies and individual investors.
A systematic approach to Thematic investing
Fund managers start by identifying a theme that shows excellent growth potential to create a successful thematic index. They then build a clear and precise expression of this theme to capture all the associated trends. They then search for specific business activities that incorporate the targeted themes. Next, 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.
If you’re interested in learning more about a systematic approach to thematic investing, check out this article on A systematic approach to thematic investing
What is a thematic index?
A thematic index, which fund and investment managers create when working through the processes described above, is an investment index that tracks the performance of companies tied to specific investment themes. For example, a fund manager might set up an index to track the performance of companies that are tied to developments in the fintech sector, or that provide exposure to a particular economic group, or that have high exposure to 5G and other technological developments.
What are the characteristics of thematic investments?
Although the exact nature of a thematic investment will differ depending on the theme in question, four general characteristics can be associated with thematic investing in general:
- Secular trends: The identification and tracking of long-term social, economic and political trends form the basis of the thematic investment.
- Sector independence: Thematic investing cuts across various sectors and asset classes, so it is not dependent on developments within a specific sector.
- Focused on change: Thematic investments are focused on capturing trends that reflect how the world is changing, always with an eye towards the future, as opposed to the historical focus of other investment methodologies.
- Theme-driven security selection: Investors choose the companies they invest in based on their exposure to the chosen theme.
If you’re interested in learning more about thematic investing, check out this article on Build Your Thematic Investing Knowledge.
Is thematic investing long-term or short-term?
Thematic investing is undoubtedly a long-term approach to investment by its nature. It works by studying and projecting long-term developments in specific economic areas and therefore is better suited to investors who are prepared to take a long, careful and studied view of their financial growth instead of the speculator looking for fast returns. This approach matches the longer-term horizons of institutions and private equity investors. If you’re interested in learning more about how thematic investing can work over an extended period of time, check out this article on Thematic investing Time Period.
How has Covid-19 affected Thematic investing?
Covid-19 has affected every area of the international economy. In addition to disrupting themes that investors had been tracking for a long time before the beginning of 2020, it has also led to the development of new trends driving the formation of new investment themes. It is also becoming a more popular way of approaching investment in general. It offers a more effective way to grasp the vagaries and unpredictable movements of the post-COVID economy.
During 2020, as the pandemic took hold and brought the global economy to a standstill, active equity fund flows plunged quickly into negative territory, the thematic sub-sector actually continued to show positive growth. The reason for this is that the thematic approach promises greater certainty regarding investment decisions, which investors will naturally reach for in times of great uncertainty, such as the current era.
As far as specific themes are concerned, the COVID-19 crisis has had a lasting and almost revolutionary impact on eight in particular:
- Healthcare innovation
- Global cities
- Changing lifestyles
- Smart manufacturing
- Climate change
- Energy transition
- Sustainable growth
If you’re interested in learning more about how thematic investing was affected by COVID-19, check out this article on How has COVID-19 affected thematic investing?.
Global thematic investing is a powerful strategy that can help investors capitalize on emerging global trends and achieve higher returns than traditional investment strategies. However, it is important to carefully consider the potential risks and consult with a financial advisor to determine if global thematic investing is right for your investment goals and risk tolerance.
Trust Nour Private Wealth with your investments
NPW Wealth Advisors understand that every individual or family has different needs regarding wealth management and investment. Ranging from portfolio construction and wealth planning right up to insurance and private capital, we make it our mission to cover all bases to ensure your financial security over the long term. Thematic investing is among the approaches our wealth management experts use to drive financial growth and protect wealth.
Our clients are retiring or retired investors and enterprising business people who demand strong investment performance and exceptional service. We provide wealth management services to high-net-worth investors, including entrepreneurs, professionals, family trusts, private charitable foundations, and estates. We also serve a select number of institutions as clients.
Contact us at 1.855.545.9090 or https://www.npw.ca/contact-us/ for more information on how we can help you protect and grow your wealth, our various services, including wealth management and portfolio management, and the tools at our disposal, such as global thematic investing, among others.