Disruptive ideas and technology are rapidly reshaping the world we live in. Some are structural long term changes and some are short term bubbles, but every change represents an investment opportunity. Thematic investing is the art of identifying these opportunities based on personal experiences and aligning investments with your beliefs and ideas. Simply put, thematic investing is a top down investment approach that helps investors take exposure to trends and ideas through a portfolio of companies expected to benefit most from such changes. A decision to invest into companies with strong brands, based on personal experience of increasing affinity towards them, is an example of thematic investing and the process of aligning your investments with beliefs.
Traditionally, institutions and fund managers have been following a relative investment approach which revolves around either adhering to or deviating from a benchmark or index. This approach has two fundamental flaws. First, short term focus on quarterly benchmarking works against the idea of having a long term horizon. Second, the very nature of the process is backward looking and fails to have a forward looking perspective by incorporating emerging trends. On the other hand, thematic investing doesn’t benchmark itself against any index and strives to achieve an absolute return goal, rather than just beating a benchmark. What’s the point of outperforming a benchmark by 5%, when it generates a return of -10% in absolute terms?
With the development of GICS — Global Industry Classification Standard — in the 1990s, the industry saw first movement towards this direction. All globally listed companies were categorised into 10 sectors like infrastructure and telecommunication, which were further divided into industries and sub-industries. Since then the structure has largely remained unchanged, even though the world today is completely different. None of the current lifestyle or technology trends like foodtech or fintech are represented by the existing structure.
Thematic investing makes more sense for retail investors, as they generally lack the tools and information required to make an investment decision. Compared to single stocks, themes are easy to identify, understand and relate to. It’s the conversations like “I believe e-commerce is becoming a huge sector and investing into related stocks would be a good idea” that make retail investors take their first step towards investing. So why not offer them what they are looking for? With the emergence of successful startups like Motif Investing in US, investors are increasingly adopting thematic investing. Last month, for the first time thematic investing was introduced to Indian retail investors by smallcase. The startup is currently offering more than 40 India focused themes like GST, Smart Cities and rising rural consumption.
With millennial investors preference toward easy to understand theme-based products, the space will surely see more action in future. It will be very interesting to see how wealth shifts from traditional sector or country focused products to thematic strategies. In the meantime, it’s not a bad idea to add some thematic flavour to your portfolio.
