What is thematic investing?
While the formal appearance of thematic investing occurred around World War II, the practice of identifying and investing in transformational geopolitical, economic, or societal change has always been a part of investing. Thematic investing is identifying and capitalizing on secular changes that transcend the business cycle and impact both how people live and how businesses operate. Whether driven by innovation, demographics, evolving social or geopolitics landscapes, thematic investing is designed to look across regions and industries to identify the specific companies, across the value chain, that are best positioned to benefit from the theme. Investment themes typically have structural origins but continually evolve in dynamic ways, meaning capturing the theme is as important as identifying the theme. We believe that thematic investing will play a growing role in the evolution of investing, driven by increased awareness and adoption.
Themes have long-term horizons and less focus on timing
Based on the above description, you might easily focus on a number of factors that appear to drive the direction and velocity of markets. Yet it is critical to differentiate between an investment theme and a tactical opportunity. For example, worries about inflation and global economic slowdown dominate much of today’s financial press. As a result, a growing current focus of investors is on mitigating the impact of inflation or, by tilting towards quality in a portfolio, to build resilience in any prolonged economic slowdown. While seemingly relevant in the short-term, we would not consider these to be long-term investment themes. In our view, thematic investing is not regime-based, cyclical or transient in nature, but rather the outcome of larger structural drivers.
Thematic investing captures the essence of structural shifts
In fact, these drivers of change can contribute to or catalyze a regime shift. For example, the supply chain disruption amidst a fracturing globalized world is one of the factors causing both heightened inflation and greater economic uncertainty. The implications of impaired global coordination are widespread and far reaching. Some companies are responding to this change by reshoring manufacturing to derisk their supply chains. We believe reshoring represents a meaningful, long-term trend with a profound impact on specific companies and the wider economy. Simply altering the inflation hedge or quality exposure of a portfolio wouldn’t necessarily insulate one from risk or optimize return potential in this scenario.
Themes can have big disparities between winners and losers
Thematic winners and losers are rarely restricted to one region, industry or factor exposure. The largest, most established companies that have performed well in the past may not be the winners of tomorrow when the world changes. Recall the profound impact of another secular change – the rise of the internet. Many of the most established companies at the time struggled and suffered following the disruption spurred by the internet. Even if a business was internet focused, it didn’t guarantee success, as exemplified by Pets.com that itself succumbed to the ‘dot-com bubble’ in the 2000s. We think that what determined whether a company was a winner or a loser through these transformations came down to business model’s agility and adaptability. It wasn't enough to simply identify regions or sectors, or even companies directly exposed to the internet. What was required instead was company specific fundamental analysis.
Tema: thematic investing managed differently
We at Tema believe that at its core, thematic investing focuses on secular trends that, not only drive growth, but unlock material enduring changes. In other words that thematic investing presents a differentiated opportunity for investors characterized by unique changes that are not limited to geographic, sector, or factor lines. For this reason, we are confident that thematics present an opportunity for investors to diversify exposure and improve risk–return tradeoffs. At Tema, we aim to offer what we believe to be thematic investing at its purest: integrity and precision in defining a theme and its winners, flexibility to thematic evolution, and professionally managed stock selection focused on quality and risk management.
In our next piece, we will talk about how to overcome performance anxiety through purity of exposure when considering thematic ETFs.