Investors love tangible stories, says Emma Wall, head of investment analysis and research at Hargreaves Lansdown.
That is why they invest in stocks such as Royal Mail, as well as wider themes such as the move to clean energy.
But this does not mean they are swapping regions for themes entirely. Rather, some investors are opting to supplement their regional and asset class diversification with the themes they like in their portfolios.
Wall tells FTAdviser In Focus which trends Hargreaves Lansdown is observing among its clients and what part thematic funds might play in an investor's portfolio.
FTA: How would you describe the difference between thematic investing and investing in mega-trends?
EW: Thematic investing identifies a particular sub-sector of the market, often gaining momentum or popularity, with differentiated drivers, such as clean energy, robotics or agricultural technology.
Mega-trends are broader structural socio-economic drivers, with global impact, such as ageing populations and digitalisation.
The best course of action is to use thematic funds as a satellite holding in a portfolio, adding a tilt to a broad-based approach.
FTA: Thematics and mega-trends offer investors the opportunity to be part of the bigger ‘story’. But is there any evidence that investors buy into this?
EW: Definitely, investors love tangible stories. Owning what you know has always appealed – look at the privatisation of former public sector industries in the UK in the 80s, and the take up of more recent flotations such a Royal Mail.
During the early months of the pandemic in 2020, a Chinese stock – also called Zoom – was mistaken for the video conferencing company, and rocketed 1,800 per cent before the regulator stepped in.
FTA: Are investors moving away from regions to themes? Which themes are attracting the most interest?
EW: Investors still seek out regional and asset class diversification within their portfolios, but this is being supplemented with themes among some client groups.
The most popular with HL investors currently are around clean energy and environmental trends.
FTA: Have you seen any generational trends when it comes to thematic or impact investing?
EW: We see clean energy and environmental trends, as well as impact funds, as popular across our client groups. Contrary to some opinion, environmental, social and governance investing is not just for younger investors – at least not for HL clients.
FTA: Europe used to be dominated by active thematic investments, whereas the US saw more investors buy into passive strategies. Is this still true today?
EW: Our client base is almost entirely UK investors, but looking more broadly at fund flows across the industry, passive strategies are growing in popularity in Europe, especially strategic beta and specialised funds that offer exposure to a sub-set of the market.
FTA: How do investors assess thematic funds, especially more niche ones that might not have vast amounts of competition?
EW: We have seen flows into active and passive funds, and exchange-traded funds that could be described as thematic.
Dependent on how niche the theme is will determine the part it should play in your portfolio. A well-diversified, and therefore robust, portfolio should have broad exposure to geographies and asset classes.
Thematic funds can exclude large parts of the market, and therefore have very differentiated and potentially volatile returns. In general, the best course of action is to use thematic funds as a satellite holding in a portfolio, adding a tilt to a broad-based approach.
FTA: How has the volatility caused by recent, and ongoing, geopolitical events influenced passive investor behaviour, if at all?
EW: When Russia first invaded Ukraine, we saw investors look to add safety and ballast to their portfolios in the form of multi-asset strategies and gold ETFs.
As the war impacted commodity prices, we saw flows into commodity ETFs; both those that track oil and gas prices, and agricultural baskets.
FTA: There has been a well-documented race to the bottom on fees for passive investing. Is there a sense that investors are willing to pay more to invest in the strategies they believe in, ie clean energy and so on?
EW: Thematic and strategy beta ETFs do tend to be more expensive than broad trackers and ETFs following the major indices.
carmen.reichman@ft.com
