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Thematic funds start to blur lines for buyers; Wealth boom spells good news for sector giants

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A theme emerges

Thematic investing is a term used a lot in the world of professional fund selection. Providers have long touted the merits of such strategies, but it’s taken a while for fund buyers to listen – or rather, it’s taken them a while to get over their existing scepticism of the concept.

Things have changed over the past year, as we’ve documented in this newsletter before. This week, research conducted for Axa IM by Broadridge finds that nine in 10 European fund selectors now invest thematically. That puts them ahead of North American and Asian counterparts, 70 per cent and 80 per cent of whom, respectively, do likewise.

Plenty of sceptics remain. Broadridge’s own report notes the common criticism that thematic funds can only raise assets in a bull market. Some domestic fund buyers say the use of these strategies is “incredibly difficult” to get right.

But the pendulum continues to swing in one particular direction. Our own research indicates that more than 70 per cent of UK DFMs now use thematic funds in their model portfolio ranges, up from 50 per cent at the start of 2020.

There are definitional questions here. Do tech-heavy US funds count as thematic investing? Do ESG strategies?

The answer nowadays tends to be ‘it depends’. In the current age, where regular equity funds can assert that they take sustainability issues into account, the line between thematic and conventional is harder to draw.

Our own statistics above don’t take into account sustainable funds focused on specific equity regions. If they did, the proportions cited would be much higher. And that points to the true sign of maturity for the thematic market: when the concept itself is ultimately viewed as little different from the practice of investing region by region.

Scaling up

A pair of wealth manager results this morning underline the opportunities available to the sector at the moment.

St James’s Place enjoyed net inflows of £5.5bn for the first half of the year, £1bn higher than in 2020, while Rathbones flows have also surged. The latter’s wealth arm saw organic flows for the first six months of the year rise by £500m to £2.3bn. Nor is it the case that 2020 represents a particularly low denominator – the company also reported a healthy increase in flows this time last year.

Look around at others who’ve recently reported and the direction of travel is clear. Inflows at Brewin and Quilter Cheviot are rising; net new money has returned at Brooks Macdonald.

Does this mean that the pie is getting bigger, or is it simply a case of the big players – as listed wealth managers tend to be – consolidating their advantage at the top of the table? A little bit of both.

We’ve written before about the boom in fund flows seen at the start of the year, as investors made use of some of their Covid savings. Equally, there’s something else going on here: SJP said today that 40 per cent of its flows continue to come from referrals from existing clients.

Whether these are clients new to the world of wealth management, or those for whom a personal recommendation and the promise of better service overrides the possibility of higher fees, is unknowable. What it does suggest is that the biggest businesses can continue to use scale and service levels to accelerate growth.

Rise and shine

Wealth management isn’t the only sector booming at the moment: earnings from Apple, Alphabet and Microsoft yesterday evening confirmed that much of the tech sector continues to boom even as some investors turn their sights to reopening trades.

What’s more, Lex believes these blowout earnings are sustainable, rather than the last puff of an artificial, pandemic-related boom.

The combined results put the previous day’s session – in which the Nasdaq suffered its worst day since May – into perspective. Even that fall equated to just a 1.2 per cent drop. One or two of the tech giants may be facing something of a Covid hangover, but the sector as a whole is still in rude health.

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