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

This article is part of
Guide to thematic investing

Why has tech and energy become so important in thematic investing?
(Jiri Vaclavek/Dreamstime.com)

Technology has been hailed as the poster child of success within the thematic fund universe, according to Tim Morris, IFA at Russell & Co Financial Advisers.

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.

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.