What is thematic investing and is it for you?

Nick Daws examines thematic investing, targeting macro trends for above-average returns in diverse sectors.

Today I’m looking at thematic investing. This is a growing trend right now.

There is no generally accepted official definition of thematic investing, but according to Wikipedia it is:

“A form of investment which aims to identify macro-level trends, and the underlying investments that stand to benefit from the materialisation of those trends.“

Thematic funds and portfolios tend to span a variety of sectors and include companies within those sectors that are relevant to the chosen theme.

For example, a healthcare-themed fund might invest in pharmaceuticals, private hospitals, health insurance providers, nursing homes, surgical equipment manufacturers, and other businesses operating in the healthcare field.

Thematic investing involves assembling a collection of companies in an area that, if the trend in question continues, will generate above-average long-term returns. 

Themes can be based on a concept such as ageing populations or the switch to renewables, or a narrower niche such as robotics or driverless cars. If the trend proceeds as forecast, a fund or portfolio based on it is obviously likely to do well.

Pros and cons

While thematic investing can offer unique opportunities, it comes with its own set of advantages and drawbacks that investors should carefully consider.

Pros

Alignment with trends: Thematic investing allows investors to align their portfolios with long-term trends shaping the global economy. By identifying and investing in themes such as renewable energy, artificial intelligence or healthcare innovation, investors can position themselves to benefit from sustained growth.

Diversification: Thematic investing offers an additional layer of diversification beyond traditional asset classes. By investing in themes, investors can spread risk and potentially reduce the impact of under-performance in any one sector.

Innovation and growth opportunities: Many thematic funds focus on sectors characterised by rapid innovation. Investing in these themes provides exposure to companies at the forefront of technological advances, potentially offering high-growth opportunities.

Socially responsible investing: Thematic investing can be a way for investors to support causes they believe in, e.g. environmental sustainability or social responsibility. Funds focusing on themes like clean energy or ethical consumption allow investors to align their financial goals with their moral values.

Global exposure: Thematic funds often invest in companies with a global footprint, providing UK investors with exposure to international markets and diversification beyond domestic equities.

Cons

Volatility and risk: Thematic investing can be more volatile than traditional investment strategies and more susceptible to short-term market fluctuations.

Over-concentration: Over-committing to a specific theme can lead to over-concentration in your portfolio. If your chosen theme under-performs, it may have a disproportionate impact on your overall investment returns.

Lack of track record: Most thematic funds are still quite new and therefore lack a long-term track record. This can make it challenging to assess their historical performance. It’s therefore important to exercise caution and thoroughly research the fund manager’s strategy before investing.

Management risk: Thematic funds depend heavily on the fund manager’s ability to identify and capitalise on emerging trends. If the manager fails to accurately anticipate shifts in the market or misjudges the potential of a theme, it could result in under-performance or even losses.

Fad investing: Themes can become trendy and attract significant investor attention, leading to inflated valuations or ‘bubbles’. This can potentially result in losses for investors who enter the market late.

Closing thoughts

If thematic investing is something that interests you, a growing number of platforms are offering this option.

Thematic investing can be an exciting and rewarding strategy for investors seeking exposure to high-growth sectors and wishing to align their portfolios with trends in society. 

The risks of thematic investing such as volatility and over-concentration should not be overlooked, though. It’s crucial to evaluate thematic funds carefully, understand the risks involved, and consider them as part of a well-diversified portfolio rather than the sole focus. 

And, most importantly, you should only invest if you have an easily-accessible cash reserve for short-term contingencies (ideally three to six months’ worth of income). You should only ever invest using money you can afford to set aside for the longer term, typically five years or more.

As always, if you have any comments about this article, please do leave them below.

Disclaimer: I am not a professional financial adviser and nothing in this article should be construed as financial advice. You should do your own due diligence before making any investment, and seek professional advice from a qualified financial adviser if in any doubt how best to proceed. All investments carry a risk of loss.

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