Investing in the world markets can be a confusing and intimidating project. Many people get discouraged before they even begin because the questions of where to invest, what to invest in, and how to invest are not always easy to answer. One of the most common approaches is sector investing, in which the investor, investment fund or wealth manager targets specific sectors, such as, say, 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?
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.
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.
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.
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.
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.
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
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.