Investments have long been defined in traditional buckets: stocks, bonds and real estate. But a growing number of investors are searching for something more reflective of the world in which businesses operate. They are choosing to deploy capital according to long-term trends or social values – otherwise known as thematic investing.
Rather than focusing solely on traditional sectors, geographic regions or company fundamentals, thematic investing focuses on big-picture themes that are expected to shape the future economy and society, such as climate change, artificial intelligence or ageing populations.
Imagine investing in your favourite fast food chain. You don’t just buy the burger, you invest in everything that makes the burger possible, from the kitchen tech to the supply chain.
How does thematic investing create returns?
Thematic investing starts with a big idea, such as AI, clean energy or the future of work. Investors then look for companies positioned to benefit from that trend, regardless of industry or geography. For example, a clean energy theme wouldn’t just focus on solar panel manufacturers – it could include utility companies, battery storage providers, rare earth miners and grid infrastructure firms.
The goal is to capture growth across the entire value chain supporting that theme. Investors often access these themes through actively managed funds that curate a group of relevant companies. Over time, the performance of the investment depends on how the trend plays out and how well the portfolio stays aligned with it.
Thematic investing offers the potential for high-conviction returns, but it also requires careful scrutiny of how real and resilient the trend actually is.
What are the pitfalls?
While thematic investing looks good on paper, and is positioned as a trend-focused way of investing, there are still risks associated with it.
One significant concern is over-concentration. Many thematic funds focus heavily on a narrow set of companies, making them vulnerable if those specific stocks underperform and leading to portfolios that are less diversified than they may appear.
For instance, many thematic investors have substantial holdings in a few dominant stocks, such as those in the “Magnificent Seven,” which can result in outsized exposure to specific market segments. Investors who have not examined the underlying holdings may be surprised when one or two big-name stocks take a downturn, negatively impacting their overall portfolios.
Another risk is theme-washing, where funds are marketed under popular trends but include companies with only a tenuous connection to it. This practice can mislead investors who believe they are gaining targeted exposure to a specific theme. A fund labelled as focusing on AI, for example, might hold companies with minimal involvement in AI technologies, diluting the thematic purity and potentially impacting performance.
Investments have long been defined in traditional buckets: stocks, bonds and real estate. But a growing number of investors are searching for something more reflective of the world in which businesses operate. They are choosing to deploy capital according to long-term trends or social values – otherwise known as thematic investing.
Rather than focusing solely on traditional sectors, geographic regions or company fundamentals, thematic investing focuses on big-picture themes that are expected to shape the future economy and society, such as climate change, artificial intelligence or ageing populations.
Imagine investing in your favourite fast food chain. You don’t just buy the burger, you invest in everything that makes the burger possible, from the kitchen tech to the supply chain.
