Thematic Investment: Profiting from Disruption

What is Thematic Investing?

Thematic portfolios are structured to take advantage of the investment opportunities generated by investment themes. These are unifying ideas linking elements that might otherwise appaear unconnected, but which in time look set to become generally understood and accepted by investors, and so reflected in performance and valuations. Thematic investors seek to identify the winners and losers as themes disrupt established industry structures.

 

Most of themes are associated with long term patterns of change in broad-based areas that include technology, life sciences, economics, politics, demographics and the environment. Within these areas, managers select more narrowly defined trends whose economic implications are imperfectly understood by investor and therefore offer the opportunity for thematic portfolio investor to generate out-performance.

 

Some managers prefer to structure their portfolios in terms of broad business concept such as "innovation", "competitive advantage" or "restructuring", which they refer to as themes.

Does Thematic Investing Work?

In order to measure thematic returns - and compare them with those generated by traditional equity managers - we created an equally weighted composite performance stream for the largest multi-themed global thematic investment funds.

This type of analysis has certain limitations. By its very nature, it reflects the returns achieved by a wide range of different thematic management styles. The result are also affected by "survivorship bias", which arises when failed funds are either dropped from the analysis or not include initially, resulting in past returns being overestimated. 

 

What Drives Thematic Stock Selection?

Thematic investing can be effective mechanism for identifying stock opportunities because it uses a different frame of reference than that of most traditional equity services. all active portfolio managers set out to compare the attractiveness of a variety of investment opportunities. However, thematic portfolio managers look at markets from a different perspective and therefore may be able to uncover different alpha sources.

 

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Reference:

"Global Thematic Research" by Alliance Bernstein