Thematics or fads: what to consider in thematic investing

Recently, a significant shift has been observed towards thematic investing: a strategy focusing on long-term trends and structural shifts in society and the economy. This approach contrasts with traditional sector-based investments, providing a lens to view potential growth areas through changing global dynamics.

Thematic investing delves into structural changes such as technological advances, demographic shifts, and evolving consumer behaviours.

Unlike conventional strategies confined by sectoral boundaries, thematic investing crosses sectors to identify companies poised for growth by aligning with global macro trends. 

What is thematic investing?

Thematic investing focuses on structural changes emanating from the shifting global landscape of economics, demographics, technology, and psychographics, sometimes also regulatory mandates. These structural changes alter consumer and company behaviour and therefore spending.

That sea change in spending gives rise to thematic tailwinds that power the businesses of companies that have identified and positioned themselves to ride those tailwinds, either organically or through M&A.

Companies that capture incremental revenue, profits and cash flow stemming from these structural changes tend to be rewarded with expanding valuation multiples over time. In the lexicon of the investing world, thematic investing identifies the causality of alpha.

Often, sector-based classification incorrectly categorises a company’s business or finds itself becoming outdated, as new technologies, products and services come to market and disrupt existing business models.

While trend/fad investing can be profitable, the challenge is in correctly timing one’s entry and exit to maximise profits.

Rather than a vertical, siloed approach, thematic investing is a horizontally focused strategy that cuts across sectors and geographies to identify companies that are best positioned to capitalise on long-term catalysts.

This approach enables investors to capitalise on long-term trends, sidestepping short-term market volatility and obsolete sector classifications and illustrating thematic investing's depth.

By identifying companies poised to benefit from evolving thematic tailwinds, investors can take advantage of opportunities while sidestepping the risks associated with companies whose business models are being impacted by thematic headwinds.

Benefits of thematic investing for advisers

Thematic investing allows advisers to focus on the structural changes or themes that will play out over the longer-term, shaping and altering competitive landscapes, but also to look past short-term market or sector noise and uncertainties. 

Themes have three defining characteristics that make them appealing to the financial advisers serving retail investors: