Thematic investing is an approach that involves investing in a specific idea, trend or theme that is expected to benefit from economic or societal changes. A systematic approach to thematic investing involves following a set of rules and procedures to ensure a disciplined and consistent approach to selecting and investing in themes. This approach aims to reduce the risk of biases and emotional decisions, resulting in a more objective and rational investment decision-making process.
There is some merit to this criticism. It is all too easy to get caught up in hypothetical speculation and even a bit of wishful thinking when one is looking around for the perfect theme to drive your investments. The antidote to these potential problems is to take a systematic approach to thematic investing – one that will ground the strategy in reality and ensure that the predictions upon which it rests follow well-developed models with a high degree of accuracy and reliability. Wealth managers such as those at NPW take a top-down approach beginning with the identification of trends. We scrutinize possible trends to determine their desirability as investment targets. Not all trends that seem promising in the current moment will show promise for future growth, so we don’t act too hastily. We make investment decisions only after careful consideration of themes and their possible outcomes.
Once a trend is identified, we then look for sectors that are associated with that trend and are most likely to benefit from its upward trajectory. We then look within that sector to find companies and other assets that are well-positioned to enjoy the growth that their respective sectors will experience as the trend develops.
Defining the objective and investment universe
Before beginning a systematic approach to thematic investing, it is important to define the investment objective and the universe of potential themes. This involves identifying the investment goals, risk tolerance, and investment time horizon. It is also necessary to identify the themes that align with the investment objectives and universe. This can be done by conducting research on macroeconomic trends, industry developments, and societal changes that may impact the investment universe.
Establishing a framework for selecting themes
A systematic approach to thematic investing involves establishing a framework for selecting themes. This involves identifying the key criteria for selecting themes, such as size, growth potential, and competitive advantage. It also involves identifying the metrics used to evaluate the themes, such as financial ratios, market share, and industry trends. By establishing a framework for selecting themes, investors can ensure a consistent and objective approach to evaluating potential themes.
Evaluating the theme’s suitability and potential
Once a framework for selecting themes has been established, the next step is to evaluate the suitability and potential of each theme. This involves conducting a thorough analysis of the theme’s business model, financial performance, competitive landscape, and market trends. By evaluating the suitability and potential of each theme, investors can identify the themes that are most likely to generate positive returns and reduce the risk of losses.
Creating a diversified portfolio
A systematic approach to thematic investing involves creating a diversified portfolio of themes that align with the investment objectives and universe. This involves selecting themes that are complementary and have low correlations to each other. By creating a diversified portfolio, investors can reduce the risk of losses and increase the potential for positive returns.
Monitoring and Rebalancing the Portfolio
Once a portfolio of themes has been established, it is important to monitor the portfolio regularly and rebalance it as necessary. This involves reviewing the performance of each theme and assessing its ongoing suitability and potential. It also involves adjusting the portfolio allocation to maintain a consistent level of risk and return. By monitoring and rebalancing the portfolio, investors can ensure that their investments remain aligned with their investment objectives and the universe.
Tips for investors,
Unfortunately, because thematic investing is sometimes prone to wishful thinking and over-optimism and can easily fall victim to spin and marketing hype, investors must be very careful when they choose a thematic investment strategy and the right wealth managers to handle it. Here are two key points to consider when you are offered when discussing thematic investments with your wealth consultants. Examining the themes and related investment products through these lenses will help you to work out whether you are being sold a fairy tale or being offered a genuine, well-thought-out, systematic investment strategy.
- Narrative congruency and plausibility: Think about the story you are being told about a particular investment theme. Does it make sense? Does it seem too good to be true? Are its projections insanely optimistic without offering any strong evidence? Investment themes are economic stories. We all want our stories to reach happy endings, but make sure that the ending you are being told about makes sense in the context of the theme and its economic context.
- Evidence-based forecasting: Once you have heard the story about how a theme is set to develop towards unprecedented economic growth, go back and look at the evidence. What are the past and current facts and figures? How and why are these figures projected to change over the long-term future? The phenomenal growth being forecasted might be absolutely plausible, provided the evidence is there.
The benefits of a systematic approach to thematic investing
A systematic approach to thematic investing can provide investors with several benefits. It can help investors reduce the risk of biases and emotional decisions, resulting in a more objective and rational investment decision-making process. It can also help investors identify themes that are most likely to generate positive returns and reduce the risk of losses. By creating a diversified portfolio of themes that align with the investment objectives and universe, investors can increase the potential for positive returns and reduce the risk of losses. Finally, by monitoring and rebalancing the portfolio regularly, investors can ensure that their investments remain aligned with their investment objectives and the universe.
Nour Private Wealth (NPW) is a Canadian company with a team of wealth advisors servicing clients across seven provinces. For more information on a systematic approach to thematic investment and other forms of wealth creation and preservation, contact us today and speak to one of our wealth advisors.