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A Systematic Approach To Thematic Investing

Thematic investing is an investment approach with the potential to generate long-term returns that are way above market. Nonetheless, the strategy is often accused of being too theoretical, and thus likely to fail or at least, perform below expectations. 

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.

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.

Nour Private Wealth (NPW) is a Canadian company with a team of wealth advisors servicing clients across seven provinces. For more information on thematic investment and other forms of wealth creation and preservation, contact us today and speak to one of our wealth advisors.

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