The first challenge any investor faces when building a portfolio is how to make sense of thousands of companies, industries and markets in an ever-changing world. There are several different ways to do so, each with its own benefits.
The traditional ‘top down’ approach groups companies by broad area of operation - Financials or Information Technology, for instance - and analyses how macroeconomic factors such as GDP growth and inflation might drive their performance as a group.
A ‘bottom up’ approach focuses on a company’s fundamentals, such as price-earnings ratios, return on equity, market share and sales growth – identifying promising companies within a sector without looking too hard at market conditions and economic indicators.
And there is growing awareness nowadays of a third approach: one that future-focused retail and institutional investors are increasingly using to inform their investment strategy. This approach takes another step back, looking first at the global ‘megatrends’ that are reshaping the world before our eyes, then analysing how these will affect companies over time.
This is called thematic investing, and it’s a simple but powerful way to build long-term portfolios that could thrive in a rapidly-changing world.
What is thematic investing?
Thematic investing is a kind of top-down approach which focuses less on traditional economic indicators such as inflation and GDP growth. Instead, it looks at longer-term, structural trends in the world, ones that could drive performance in ways traditional investors may not yet realise.
These could be geopolitical, such as growing power and wealth in emerging economies, or technological, such as the transformative impact of disruptive technology and digitalisation, or social, such as the way accelerating urbanisation will expand the world’s cities many times over in the decades to come. Climate change and resource scarcity is another such ‘megatrend’ which will cascade through the world’s companies over the next few decades – a shift which a traditional shorter-horizon investment approach may not accommodate.
Thematic investing’s global and long-term view is unconstrained by the geographical or sector categories of traditional investment approaches. It aims to identify companies, wherever they are in the world, that may be positioned to benefit from emerging themes set to play out over years or even decades – not just the next financial quarter.
This forward-looking investing approach analyses how tectonic shifts will bring some companies great success, and others existential struggle. Tomorrow’s leading companies may be unknown today, operating in areas which will come to revolutionise some aspect of daily life, whether that’s AI, carbon-neutral technology, fully autonomous vehicles or smart homes.
Conversely, today’s winners – the world’s biggest companies, systematically preferred by market-cap-weighted funds – may struggle in a new millennial-led environment of green energy, digital transformation and disruptive technology
How to capture themes in investment portfolios
Thematic investing isn’t a new concept. Some active investors have practised this approach for decades, using human-based quality control and dynamic stock selection. This has often been accompanied by higher management fees and a lack of transparency.
What’s new about thematic investing in recent years is the democratisation and cost reduction of the strategy – bringing advanced technologies and low-cost passive investment vehicles into a space that was once the preserve of the active manager.
Lyxor has partnered with indexing giant and data powerhouse MSCI to create a new set of indices covering some of the biggest thematic investing trends of our world. These combine active human oversight, passive implementation, and the latest data science technologies to build portfolios that should thrive in the future – for a fraction of the price of most standard active funds.
The five new Thematic ETFs cover what we feel are the most important emerging investment themes of our age: the growth of the Digital Economy and Disruptive Technology, urban change with Future Mobility and Smart Cities, and the buying habits of Millennials.
