What is thematic investing?

Thematic investing is a broad term that is widely used, particularly within equity investing, but its meaning can differ depending on the audience.

In general, it is considered to mean a top-down investment approach with a focus on broader, macroeconomic themes that a fund manager can use to identify strong companies.

Frances Hudson, strategist for multi-asset investing at Standard Life Investments, says: “It tends to be global [and] it can be multi-asset, although within wealth management it is primarily equities. The manager will pick things they think are important, so it might be the emergence of emerging markets, something changing about technology, or an aspect of the environment, such as water shortages.

“They have to be able to populate the themes with things they can invest in. That is sometimes where there is a missing link, as you can have quite strong ideas about what is going on in terms of the environment, but if you try and screen through all the companies out there, finding something that captures the ideas and is of sufficient quality, liquidity and everything else is sometimes quite difficult.”

Thematic investing can be captured in the investment philosophy of one fund or a range of strategies, or it can be a house style as adopted by companies such as Neptune, Newton and Veritas.

Charles Richardson, manager of the Veritas Global Equity Income fund, notes that 20 years ago the term ‘themes’ was “not part of the accepted lexicon of the asset management business”.

He says: “At that time, typically, many prospective clients or their advisers wanted to know about the four Ps (philosophy, people, process and performance) and they expected some peg to hang you on – value, growth, regional focus and so on.

“Today, ‘thematic’ appears everywhere. Like all strategies, it needs definition, and the key is successful implementation. For our part, the use of themes was borne out of a desire to capture certain benefits of an investment approach, as well as to escape from some ‘conventional wisdom’ that was highly questionable.”

According to Mr Richardson, the benefits include the formulation of strategic context, getting behind future tailwinds, narrowing the universe, and focusing further research while avoiding spot forecasting or market timing.

That said, he warns that themes don’t pick stocks. “You cannot shoehorn a complex company and its valuation into a theme,” he says. “Don’t even try, and don’t believe those who rely too heavily on themes. Themes encourage momentum investing and do not value a company’s equity, nor do they define quality.”

Ben Willis, investment manager and head of research at Whitechurch Securities, points out a number of well-known thematic trends have become commonplace over the years, including developing and emerging market wealth creation, clean energy, natural resource scarcity, climate change and disruptive technology.

Darius McDermott, managing director of Chelsea Financial Services, suggests thematic investing grew after the technology bubble burst at the beginning of the century, although some companies had been investing in this way for some time.