Why demand for this type of fund is booming

Last year, global assets under management rose by 77% for funds that approach collective investing a different way.

As global themes from sustainability and digitalisation, to fintech and cybersecurity have taken centre stage in a world disrupted by coronavirus and growing evidence of serious climate change, a new, thematic approach to collective investing is rapidly gaining traction.

Thematic funds now contain around €572 billion (£484 billion) of assets worldwide, according to recent research from AXA Investment Management, and they’re growing dramatically. Not only have thematic assets under management (AUM) risen by an average 37% per year since 2018, but in 2020 alone AUM shot up by a massive 77%.

“While thematic assets represent a small part of the overall funds market, this corner of the industry has taken almost two-fifths of all fund net sales since 2017,” explains AXA’s head of global thematic strategies Tom Riley.

Thematic fund managers approach collective investing a different way. Instead of focusing on businesses in a specific geographical region, market capitalisation or industrial sector, they aim to identify major long-term structural trends in the world - whether driven by political, social or economic forces or, increasingly, disruption in nature – and then invest in the companies best placed to engage with and benefit from those changes.

• An asset class with ‘an incredible future’
• Funds and investment trusts that have returned to form
• Hydrogen-focused investment trust launches

As David Docherty, thematic investment director at Schroders, points out, there are clear attractions for investors, who are able “to seek investment returns by investing with precision in trends important to them”.

Pandemic has thrown up huge opportunities for innovation

And the attractions are growing, particularly for growth-focused investors: “As investors’ intellectual and emotional connections to themes have strengthened, thematic funds are becoming increasingly prominent in their thinking. Through such funds, they can gain exposure to companies within long-term themes whose growth prospects are not yet recognised in their share prices,” says Docherty.

Clearly, the past 18 months of the pandemic have thrown up huge challenges and equally huge opportunities for innovation. AXA Investment Management’s findings highlight the ‘dawn of a remote economy’, from the decline of cash to the boom in home working, shopping and entertainment.

At the same time, increasingly erratic and extreme weather globally has brought real urgency to climate-related initiatives and opened up new investment opportunities.

Docherty makes the point that “many thematic funds offer exposure to impact goals related to the UN Sustainable Development Goals”. As well as climate change, themes such as energy transition, healthcare innovation, urbanisation, digital infrastructure and sustainable food and water play all provide rich pickings for canny investors.

One important quality of thematic funds to emerge during 2020’s market turbulence was their resilience, with no fall-off in thematic equity net flows even throughout last March’s turbulence. “Unlike many other types of fund, they have been able to raise assets against the backdrop of Covid,” says Riley.

Sustainability and disruptive technology two key areas of interest

So what are the most attractive thematic opportunities? It depends where you’re asking the question, the AXA research suggests. Looking at fund flows between 2017 and 2020, sustainability was very much at the forefront of European investors’ minds, whereas emerging and disruptive technologies won out in Asia Pacific and North America. 

Ultimately, as Docherty observes, there are great opportunities for human ingenuity - and therefore for profitable investment - in numerous areas of 21st-century life. These include “global priorities for the environment, sustainable infrastructure, responsible consumption, inclusion, and health and welfare, all of which are underpinned by the imperatives of protecting our planet and investing for people”.

• Hot sector: should investors put down roots in plant-based foods?
• How fund managers have positively influenced companies
• ESG fund speed dating: the key questions to ask to find your match

How should thematic funds be used within your portfolio? Until recently, thematic investments were typically viewed by private investors as ‘bolt-on’ specialist holdings to spice up a core portfolio of conventional funds, but the evidence suggests that investors also changing their approach in this respect too.

As Riley reports: “Increasingly, especially in Europe, they are used as a diversifier within global equity portfolios.”

Docherty goes even further: “As thematic investing has become more popular, so too has the notion that an entire portfolio might be dedicated to investment themes, such as through a multi-thematic portfolio.”

Indeed, he adds, the emergence of thematic credit funds and multi-asset funds as well as equity options “is indicative of the extent to which thematic investing is becoming an increasingly central part of investors’ investment thinking”.

• Don't be shy, ask ii...how do I tidy up my investment portfolio?​​​​​​​
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

However, it is important to be disciplined in regard to these funds just as elsewhere in investing. Themes need to be strong and broad enough to give the fund manager choice, but not so wide as to lose the focus investors seek. As Docherty observes: “The chosen themes also need to have valuation upside, because thematic investors are ultimately investing in stocks and shares rather than in themes as abstractions”.

Both commentators believe there has been a recent step change in the use of these funds. Riley concludes: “Thematic funds have already transformed the industry…and it is not unreasonable to think they will continue to play an important role as we transition to this new normal of equity investing.”