A three-minute guide to thematic investing

As Capital Group’s Martin Romo pointed out recently: a lot can happen in 10 years, particularly when a period of extreme adversity spurs innovation and behavioural changes to help address some of the era’s biggest problems.

“Ten years from now I think we will look back on COVID as our generation’s ‘Pearl Harbor moment’”, he said. “When Pearl Harbor happened, the U.S. artillery was 75% horse drawn. Let me say that again: In 1941, three quarters of the U.S. artillery depended on horses. Yet by the end of the war they had entered the atomic age. That incredible transformation sparked a period of innovation and growth in the U.S. economy that lasted for decades.

“Fast forward to today and we’ve seen an almost magically rapid development of COVID vaccines at a speed few thought possible. COVID could be the trigger that spurs us to tackle other critical issues like the cost of healthcare, education, and housing. In 2030 we may be living, working, studying, and playing in a radically new world.”

If this is case, investing in these themes may be rewarding.

What is thematic investing?

When an investor uses a thematic investing approach, they’re focusing their investing efforts on predicted long-term trends and then the underlying investments that stand to benefit from the materialisation of those trends.

One of the pros of thematic investing is that it can be easy to understand and give investors a clear focus. There is also a reasonable choice. For example, there are a number of exciting themes that could lead to a very different world in the next decade – climate change and decarbonisation; the rise of electric and autonomous vehicles; cloud computing; cryptocurrencies and delivery drones to name a few.

So, it is really that simple? Identify a long-term theme, invest your money in a company (or companies) benefiting from the theme, and sit back and wait for the next 30 years or so. Unfortunately, not. As with everything there are also some cons.

Sometimes, a long-term theme is identified, but takes many years to start to come to fruition. The journey can take many different twists and turns and different people (and companies) will take different routes to get to the same end point. In the same way, how you invest in a theme can change dramatically over time.

It’s also possible to get carried away by the hype of a theme rather than investing in what is best for you as an individual.

Investing in thematic funds

A simple way is to invest is via funds that are embracing a lot of different themes, therefore diversifying risk and giving you exposure to more opportunities.

Liontrust Sustainable Future Managed is one such example. It is a multi-asset fund whose managers have identified three mega-trends for investment. These are: better resource efficiency (cleaner), improved health (healthier), and greater safety and resilience (safer). Within these three buckets the team has identified 20 areas of predictable and resilient growth.

Then there is Guinness Global Innovators, whose managers have identified nine core innovation themes. These themes are: advanced healthcare; artificial intelligence and big data; clean energy and sustainability; cloud computing; internet, media, and entertainment; mobile technology and the internet of things; next generation consumer; payments and FinTech; robotics and automation.

But if you want to invest directly into an individual theme, here are a selection that I believe will stand the test of time:

Schroder Digital infrastructure 

Technological advances are driving massive demand for data and therefore digital infrastructure. Despite this, our digital infrastructure is way behind where it needs to be. Half the global population still don’t even have access to the internet. Schroder Digital Infrastructure fund seeks to take advantage of the ever-increasing demand for digital infrastructure and the sustainable transition to a digital economy. It invests around the world in a mixture of emerging and developed markets.

Sanlam Global Artificial Intelligence 

The speed of disruption and level of adoption of AI across the globe has been extraordinary in recent years. From farming to cyber security, it is now impacting all sectors of the economy and our lives. This fund 'eats its own cooking' using an artificial intelligence (AI) system to help find companies whose business models are aligned to benefit from this growing theme. The fund is unconstrained in that it can invest in businesses of almost any size and in more than just technology stalwarts; around half of the portfolio can be found in the healthcare, industrial and consumer-related sectors.

VT Gravis Clean Energy Income 

Renewable energy is undergoing mass adoption. This fund taps into the expertise of the Gravis group to create a portfolio of renewable energy and energy-efficiency related projects that are benefiting from the secular move to more sustainable energy demands. It looks to generate an attractive income, alongside modest capital growth, from a spread of different projects that should deliver defensive, uncorrelated performance.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.

Published on 24/08/2022