How do thematic funds fit within portfolios?

"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.

The result is that thematic investing can be a powerful way to generate alpha. 

She adds: “We believe that as more ‘multi-thematic’ products become available, potentially institutional investors are able to allocate part of their risk budget to such investments while achieving sufficient diversification.”

Interestingly, Rob Powell, head of thematic and sector product strategy at BlackRock, also says that both retail and institutional investors are increasingly using thematic funds to gain exposure to structural growth and disruption in their portfolios across the cycle.

For us, thematic funds tend to be of the most use for those clients with strong sustainable preferences.Nick Wood, Quilter Cheviot

He says: “Thematic investing is not new. Investors of all kinds have always looked at long-term investment themes when implementing stock selection in their portfolios.

"Thematic funds that focus on these long-term themes are relatively new. In many cases, their existence provides access to investments that people can understand and that resonate with their everyday lives, hence their popularity."

Despite their popularity, as with any other investment strategy, it is important to understand how thematic investing works. Moreover, with thematic investing there is an added challenge that it can be difficult to benchmark thematic funds.

Wood says: “Benchmarking is most clearly an issue for the active funds in the space. For many thematic funds, there isn't an appropriate comparator index, and the ability to assess the skill of the manager by this means can therefore be limited.

"One might use a peer group approach, but even here you are likely to find very different ways of managing what may appear to be similar strategies, and it is not easy to compare like with like. 

"For us, thematic funds tend to be of the most use for those clients with strong sustainable preferences, where we might be targeting specific areas such as energy transition.”

Future of thematics

There is no doubt that the pandemic changed the finance world. The thematic investing universe has been no different. 

According to Andreas Fruschki, head of thematic equity at Allianz Global Investors, Covid-19 has accelerated certain developments, such as the digitalisation in many areas of our daily lives.

It has put an additional spotlight on thematic investing.

As such, thematic funds were able to capture these developments well and benefit, performance wise.

Most notably, major themes have existed before the pandemic and continue to be relevant.