ESG Investing  

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

This article is part of
Guide to thematic investing

“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.

“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.”

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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.”

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.