Understanding Thematic Investing Strategy

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You’ve probably heard of common investment strategies like growth investing, value investing, or quality investing. Aside from many other types of strategies, thematic investment emerges (relatively) quite recently, as the name suggests, the investors seek to invest based on a certain… theme. Yup. It’s redundant, we know, but we’ll explain it further.

How do you invest based on themes?

Now, this is where explaining gets harder, not because it is complex, but because it is too simple that the scope is too wide.

Simply, you can invest in any sort of theme you find fit.

Are you an environmentally-concerned investor? Then invest in companies that employ environmentally-friendly business practices.

Are you a strong believer in techs such as Artificial Intelligence (AI) or the Internet of Things? Well, your portfolio then will be a mix of companies that leverages these techs.

There is really no saying when or where these themes will stop. Humans have been moving from one trend to another, and moving in parallel with these trends are these investors that aim to have their cash growing on the trends.

How is thematic investing different from other styles?

Some users went and ask us, how is thematic investment style was different from other styles. Sector investing style, for example, is almost similar. You invest in a certain sector that you like, doesn’t that constitute a theme? What about ETFs, what about this, what about that?

Well, in a way, yes. You could say they are almost similar. What differentiates thematic investing style from other types of investment is that thematic investing style isn’t limited to one particular sector, or one particular index, or one particular… whatever.

We’ll put it in an example. Say, you’re looking to adopt environment-themed investments. You may invest in a tech company, a manufacturing company, energy, or utilities, or this — or that, the bottom line is: they must all contribute to the environment (and your pockets, of course).

They’re not limited to any specific company, any specific market, sector, or index, as long as it suits your goals, you go for it.

As for ETFs and funds, you can regard these as mere tools, and the methods used in building these tools could differ. You can find ETFs that use value-based strategy, you can even find ETFs with growth strategy, and in the same way, you can find thematic-based ETFs. It’s the same case for funds.

Five major styles of thematic investment

Let’s dive in deeper now. As we said, there are too many themes under thematic investment strategy, but that doesn’t mean that it’s all wild west in there. If you look at the macro level, you can see that these many themes can be grouped into five main styles.

That’s what Fidelity Investments did, and they laid down these five major groups:

1. Disruption

Disruption-themed investment style is usually where the investment portfolio consists of stocks that are involved with any developments that are in the early stage, but according to their analysis, it may ‘disrupt’ the market.

For example, AI and machine learning (at the time this is written) are still in the early stage of development. However, many are putting their bet on how big AI is going to grow.

Microsoft, for example, invested $10 billion in Open AI. This company developed ChatGPT, an AI-based software that allows users to chat with the software using natural language and ask it to do things like correct their codes, write a poem, or even write investment guides for online publications (uh-oh).

2. Megatrends

Much like the jeans you wear, the world moves and changes according to certain kinds of trends. We’re not going to speak of that kind of trend, although they are somewhat interrelated.

Take music, for example. How world events affect the kind of music that emerges throughout time. War in the 60s led to many rock masterpieces, and defiance of political restraints led to many underground genres like black metal and punk.

Again, we’re not speaking of that (well, we kinda did… sorry). The megatrend method here is to identify a trend (whatever it is) that is at an early stage and will be so colossal in nature that it will affect the trajectory of the market at large somewhere in the future.

Take Apple (NASDAQ: AAPL) or Microsoft (NASDAQ: MSFT), for example, way before the internet is a thing. Heck, even way before computers are common. Imagine if you are an investor back then, and you’ve put your stakes in these companies. Keep imagining lol.

What you can do more than imagine is adopt a megatrend strategy that manages to foresee how the future may look like. There you go, ka-ching!

3. Environmental, Social, and Governance (ESG)

This one is relatively straightforward. This is where investors search for stocks that are in line with any part of the ESG concerns.

Under this macro-theme, you can find many themes such as environment-themed stocks, social-based stocks, or governance-based stocks. Even under these divisions, you can look deeper. Perhaps under environmental, you can look for green-energy-themed investments, climate-friendly investments, or carbon-themed investments.

Read More: Understanding ESG Stocks — is it better?

4. Differentiated Insights

This method is quite similar to the common ways of doing research and obtaining insights on companies — the key difference is that this method looks at different things than what is commonly evaluated when picking stocks.

The common ways may be looking at market capitalization or whether the company is undervalued or not. This method looks at different perspectives, like which company still has its founders as the key decision-makers, and so on.

Simply, it’s similar to the common method in a way that they base their stock picks on insights, but the difference is the angle from which they look at the stocks.

5. Outcome-Oriented

This is where thematic investing sorts of overlaps with other methods of stock picking. It is where investors focus on which stocks will provide them with desirable outcomes.

Say, an investor wants to be exposed to the US market, but the market is pretty volatile at the moment. What they will do is they’ll look for funds that pick stocks with stable performance when the market is volatile — regardless of sectors, business activities, market capitalization, etc.

Is it good?

Well, the short answer is: if your predictions turn out to be true. Unlike the usual funds/ETFs that you see, thematic investing doesn’t really concern with balancing risk in your portfolio.

In the common funds/ETFs, multiple stocks of different risk levels are grouped together so that you can ensure a safe but slow passage in generating growth (of course, they can also fail).

As for thematic investments, the main concern is to find stocks that would reflect the theme, I.e., the ones that will grow in accordance with the theme, such as AI growth, Internet of Things, and others.

The downside is if your prediction turns out to be wrong, or if the company that you invested in simply fails to keep up with the race. Then you might be looking at a failed investment.


Bottom line

Thematic investment is a good way to grow your wealth if you are confident about a certain thematic growth in the market. It’s where you jump on the bandwagon and join in for the ride to the moon. It could also possess a risk if your guess turns out to be wrong.

Or, if your concern is not about the money, it’s a good way to invest your money for the cause you believe in, like fighting climate change, gender equality, or whatever you vibe with.

Our advice is for you to look before you leap on the bandwagon, and be sure to constantly look (always do your research and keep updated with the news). The moment you leap may be a good time to leap but bear in mind that circumstances may change and it could be wise to let go — or at least change some stocks that are dragging you down.

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None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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