Thematic investing has been getting lots of attention lately as the world’s entrepreneurs try to develop solutions to modern societies problems. Here is a quick explainer to help you understand the exciting investment strategy everyone is talking about.
What Is Thematic Investing?
Thematic investing is an investment approach that focuses on predicted long term, global trends. These are also known as “Mega Trends”. These mega trends are long term, influential movements that are seen on a global scale. Thematic investors are looking for social and economic trends that will change the way people live their lives.
Thematic investing works a little backwards compared to traditional investment philosophy. This strategy involves looking to invest in themes as opposed to sectors or individual companies. Thematic investors first identify a specific trend. Only then do they start looking at different sectors and companies that support them. They believe in the future and invest in mostly small/mid-sized companies that have the potential to become globally recognized names.
What are Themes?
By broad definition, a theme can be any idea that is going to have a global impact. Some examples of different themes are:
- ESG Investing
- Plant Based Food
- Green Energy
- Disruptive Technology
- Infrastructure
- Healthcare
Advantages and Disadvantages
As with any investment approach, thematic investing has its pros and cons.
Advantage: Provides Concentrated Exposure
Unlike a traditional mutual fund that may have several different sectors and companies in its portfolio, a thematic investment portfolio is targeted and focused. This allows investors to truly grow their assets with the companies that the fund invests in.
Disadvantage: Risk Levels
Thematic investors are not looking for tried and true companies. They are typically looking at up and coming companies that have yet to make their impact. This can mean increased risk to investors. Thematic investing is usually best for investors who have a long-term investment horizon.
Advantage: Can provide a hedge in a Portfolio
Since thematic investors are focused on change and disruption, it can provide investors with a hedge against investments that are susceptible to downturns due to disruptive technology.
Disadvantage: Higher Fees
Thematic investment managers are heavy researchers and there is a lot of work and screening that goes into developing a thematic portfolio. This is reflected in the MER’s of many of these funds.
The Bottom Line
Thematic investing is quickly gaining popularity and can provide the right investor with a wealth of opportunity.