How do thematic funds fit within portfolios?

This article is part of
Guide to thematic investing

How do thematic funds fit within portfolios?
(Vardan Papikyan/Unsplash)

The history of thematic funds, according to Morningstar, goes back to the end of the second world war, where a Chicago fund sought to profit from the booming television industry. Thematic exchange-traded funds came later, in the 2000s.

Nick Wood, head of research at Quilter Cheviot, explains that the principle behind setting up a thematic fund is investing in an area that you believe is undergoing a structural change that you think will be powerful enough to ensure outperformance over a long-term time horizon.

Wood says: "For the investment industry, this has meant launching products ranging from very specific niches to much broader multi-thematic funds.”

He adds that thematic ETFs are versatile and can fit into a client’s portfolio depending on how specific, broad, active or passive their requirements are.

“Thematic ETFs vary from broad based to highly specific in nature. For example, there have recently been a number of launches focused on the metaverse, with Invesco being the very latest example. Thematic can be active or passive, and both variations have witnessed significant growth in interest and launches in recent years.”

A popular choice

Thematic funds, which are investments that allocate towards a specific theme or a number of themes, such as clean energy, the metaverse or electric vehicles, have been steadily gaining popularity. 

This was highlighted in a study by Global X, which found that 2021 saw thematic ETFs record $12.5bn (£10.8bn) of net inflows, while in the US this number was a staggering $44.3bn (£38.3bn). The most popular themes with investors included climate change, big data and disruptive technologies.

According to Morningstar data, in the trailing three years to the end of 2021, assets under management in these funds grew nearly threefold to $806bn worldwide.

This represented 2.7 per cent of all assets invested in equity funds globally, up from 0.8 per cent 10 years ago.

Thematic funds are thought to be more popular with the retail end of the market rather than with institutional investors, who prefer more diversification.

Chloe Shea, investment director for multi-asset at Schroders, says thematic investing is increasingly attractive because it provides active long-term exposure to powerful and persistent themes that are transforming "our planet and daily lives".

She adds: "Currently, the products that are available in the market are typically single-themed funds, which allow clients to invest with precision in trends that are important to them. 

“This means that investors will have to take an active view on the themes. However, as institutional investors tend to be more ‘diversified’ in investments, we have not seen a tremendous interest in thematic investment just yet.

"In addition, institutional investors typically manage across multiple-asset classes with a traditional strategic asset allocation approach. Therefore, thematic investing may not necessarily fit well into institutional investors’ existing framework.”

However, Shea says that globalisation has made geographic allocations or even sector allocations less important.