Thematic investing: what it is and how to get involved

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Climate change, ageing populations and food shortages are three macro trends shaping our world. They are also three themes investors can profit from if they invest in the right companies at the right time.

Take the example of food demand soaring thanks to population growth, rising affluence and changing diets. To play this theme, putting money into seed companies, fertiliser businesses or equipment manufacturers could be lucrative.

This is known as thematic or trend investing – a way of profiting from long-term shifts, whether they are structural, economic or social.

One of the main benefits of the approach is it forces investors to focus on the bigger picture and ignore the noise of short-term events such as interest rate rises or turbulence in emerging markets.

This certainly isn’t the approach for investors with short time horizons. Some of these themes will take decades to play out.

There are two stages to thematic investing.

It typically starts with identifying broad, macroeconomic, technological, environmental or social themes and moves on to finding suitable high-quality shares that fit with those pictures.

Tom Stevenson, investment director for personal investing at Fidelity International, says both stages are equally important.

“Without regard for the second stage and by just focusing on the top-down thematic approach, investors can simply end up trend-chasing, which could result in costly mistakes.”

This is what happened during the dotcom bubble in the late 1990s.

While the market was right about the theme, a lack of discipline when it came to valuation of shares undermined the story and the returns.

“Everyone was buying, regardless of how expensive things got,” says Stevenson.

Trends can also go out of favour and be prone to faddishness.

“In 2007 a raft of climate change related funds were launched to capitalise on this theme, some of which have subsequently closed as performance disappointed and investor appetite waned,” says Jason Hollands of Tilney Bestinvest.


If individual stock picking isn’t for you, there a few different of ways of investing in themes through funds. Some strategies are incredibly niche, focusing on one specific theme.

A few examples include: Pictet, which has funds focused on robotics, water and agriculture and clean energy; Sarasin and Partners, which has the Food & Agriculture Opportunities fund; and the iShares Global Water Ucits ETF.

Then there are funds focusing on a number of different themes such as Pictet-Global Megatrend Selection, which combines eight ideas including timber and water, clean energy and digital communication.

Or Sarasin EquiSar Global Thematic, which has five core corporate themes including disruption and innovation and franchise power.

Some fund groups apply a thematic approach to all their regional and global funds. Newton Investment Management, for example, has a 30 year history of thematic investing.

It recently added two new themes to its approach:

‘Abundance’ is based on the belief that a range of factors are preventing business rationalisation, bringing new modes of competition and price transparency to wide parts of the economy, and ultimately contributing to an abundance of goods and services.

And ‘Mind the gaps’ focuses on the enduring weakness of global growth, which is creating greater differences between countries, industries and companies.

The theme is based upon a belief that in a challenging (and more policy-limited) global environment, structural differences are likely to be of greater significance in determining investment returns.

It suggests a highly cautious approach to companies with poor governance, under-investment in technology or excessive borrowing.

Darius McDermott, managing director of Chelsea Financial Services, tips Newton’s Global Income and Emerging Markets funds.



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