Why has tech and energy become so important in thematic investing?

He says the popularity of tech-based funds can be attributed to the fact that the digital revolution is "well underway".

Morris adds: “Artificial intelligence advancements, not to mention such alternative worlds of the metaverse, offer potential that is [as] yet unforeseen.

"And the transition to find other sources of energy, clean or not, has been accelerated to a level of urgency not seen in generations. This is a bet on the future financial stability and wellbeing of society.”

Rise of tech

Echoing Morris' comments about the popularity of tech-based thematic funds is David Docherty, investment director of multi-regional equity at Schroders, who says tech is a key driver of many investment themes as companies use technological ingenuity to innovate and address the numerous imbalances in the world; whether between populations and resources or between supply and demand in individual industries.

"It is often said that necessity is the mother of invention and in this sense, we will see technology powering a number of investment themes in the wake of the tragic events playing out in Ukraine," Docherty adds.

The rise of the tech sector has also seen investment managers expand their operations into the thematic fund space. 

Technology themes, as the name suggests, target the disruptive growth potential of technological change.

In essence, thematic investing is about capturing long-term structural change.Andreas Fruschki, Allianz Global Investors

Interestingly, Andreas Fruschki, head of thematic equity at Allianz Global Investors, believes that the popularity of the tech-based thematic funds has propelled its success to new heights because providers are more likely to launch products in the better performing areas of the markets. 

He says: “To some extent the strong performance of the technology sector and related stocks may have nourished the creation of tech-related theme funds. Providers are more likely to launch products in the better performing areas of the markets.

"This in turn may have fuelled some the rally in technology by putting an even greater spotlight on this part of the market and direction flows."  

Fruschki adds: “Having said this, there are however also strong fundamental reasons why thematic investing has a certain focus on technology-related themes.

"In essence, thematic investing is about capturing long-term structural change – as opposed to shorter-term cyclical fluctuations. The technology sector is a prime market area where this type of change can be identified and is a key enabler of such change in other market areas.”

ESG upstart

Despite the huge popularity of tech-based thematic funds, Laith Khalaf, head of investment analysis at AJ Bell, says thematic funds based on environmental, social, and governance factors could soon give tech-based funds a run for their money.

Khalaf says: “Thematic funds come in many shapes and sizes so it’s hard to make generalisations about the category as a whole.  

“Specific themes within the technology sector have also proved popular after a number of years of extremely attractive returns. However, this year has been more challenging for the tech sector, with more traditional sectors like energy and financial coming to the fore.

Policymakers’ aim to achieve energy independence through investment in renewables has been a key driver of demand.Rob Powell, BlackRock

“Clearly ESG has been a focus for investors in the past few years and that has favoured flows into thematic funds targeting this area of investment, including renewable energy funds.”

The rising popularity of energy funds in the thematic fund universe was also highlighted by Rob Powell, head of thematic and sector product strategy at BlackRock: “Investors use thematic funds to gain exposure to investment themes that they believe are going to be driving disruption in the world over the long-term, and to implement specific views that are not captured by traditional sector and regional funds.

"Energy has been the best-performing global industry classification standard sector in 2022, within thematic, and at an industry level we have seen flows moving towards funds investing in sustainable and renewable energy stocks that are aligned to the long-term structural shift away from hydrocarbons. 

“In our view, policymakers’ aim to achieve energy independence through investment in renewables has been a key driver of demand for these funds.”

Thematic structure

Morris adds the structure of thematic funds means investors do not need to build a strict portfolio of thematic funds to achieve success. 

Commenting on the discipline behind building pure thematic funds, he says: “I don’t really see this. In fact, I often recommend ETFs for exposure to thematic sectors.

"Although personally, when it comes to asset classes such as renewable infrastructure, some of the most interesting opportunities are currently offered through investment trusts. Perhaps because they have less restrictions and liquidity concerns when it comes to investing in alternatives.”

Greenwashing is a real and present danger for ESG investing.Tim Morris, Russell & Co 

However, Morris notes that there is a danger that the discipline behind building thematic funds is being diluted as a result of their popularity.

He says: “There is certainly a threat to the integrity of thematic funds. There will always be an element of people jumping on the bandwagon, partly due to the fear of missing out. 

"And greenwashing is a real and present danger for ESG investing. Lower standards or overzealous marketing could create a race to the bottom that won’t benefit anyone.”

The nature of tech and energy-based thematic funds is that they can be easily effected by world events.

With energy transition and security at the forefront of people’s minds, the current carbon emission fears and war in Ukraine could have a big impact on the two most popular themes.

However, this does not always spell doom and gloom.

In fact, Docherty expects the recent carbon emission fears and the war in Ukraine to result in major investments within tech and energy-based thematic funds. 

He says: “Carbon emission fears have for some time been driving the transition from fossil fuels to clean energy and we believe that massive ongoing investment will see this process continue.

Other energy funds should receive inflows due to the rampant profiteering.Daniel Elkington, Keep It Easy Financial Planning

The war in Ukraine means that the challenge of energy security has been brought into even sharper relief, such that governments and corporates see investment in secure clean energy as all the more urgent.

"As the quantum and pace of this investment increases we would therefore expect there to be continued growth in funds exposed to the clean energy theme as investors seek exposure to those corporates both enabling the energy transition and those firms whose actions in mitigating climate change will also reduce our use of, and dependence on, imported fossil fuels.”

Daniel Elkington, IFA from Keep It Easy Financial Planning, also suggests the war in Ukraine could see a rise in energy-based thematic investing.

He says: “With Russia cutting supplies to Europe, the working theory is that France, Germany et al will pile resources into energy transition to accelerate the UN's agenda 2030.

"Other energy funds should receive inflows due to the rampant profiteering, ie return on investment for investors in these sectors.” 

Aamina Zafar is a freelance journalist