As Frances Hudson, global thematic strategist at Standard Life Investments, points out there is no neat category for thematic investing.
“You could argue, I suppose, that anything that is a single-sector fund is thematic if it just looks at one particular theme. The same with a technology fund – it really is just how you slice it.”
However, she adds that with a thematic approach the manager perhaps needs a higher conviction in the theme to start with, “but from that point on it is portfolio construction as normal”.
Ben Willis, investment manager and head of research at Whitechurch Securities, agrees that it is difficult to compare thematic investing with each other or to alternative investment approaches.
“Performance relies on a number of factors. First and foremost is whether you have invested into the right themes. Also, performance relies heavily on the manager. Even if a manager has been successful in their thematic selection, their actual stock selection will still affect numbers – poor stock selection will hamper returns and undermine any successfully identified thematic trend.”
The point that thematic investing still needs good stock selection in the underlying portfolio is important to grasp.
Ben Seager-Scott, senior analyst at Bestinvest, explains: “This sort of top-down investment style is conceptually at the other end of the spectrum from pure bottom-up stock picking where the manager claims to pay little attention to the wider picture and just focuses on companies that are good in their own right.
“In reality there is a lot of overlap between the two ideas, and the main difference is the starting point – whether you start with a theme or a watch list of companies. After all, with top-down investing, the manager will still be doing stock picking to find good companies within each ‘theme’. On the flip side, a bottom-up stockpicker will often end up with ‘themes’ emerging in their portfolio where there are a lot of attractive companies deriving benefit from a broad theme – a good example of this is in the emerging markets, where a lot of bottom-up stockpickers tend to have a lot of exposure to the ‘theme’ of domestic consumption.
Charles Richardson, manager of the Veritas Global Equity Income fund, notes that themes essentially act as filters to help identify stock ideas, so investment results will ultimately depend on stock selection and the timing of these stock purchases.
