Thematic investing can be a great way for investors to put their money where it matters.
But how can investors select the right thematic fund and separate the wheat from the chaff?
At Wisdom Tree, we believe there are five building blocks that are critical to choosing successful thematic funds in the long run.
These are clarity of theme, expertise, purity of exposure, differentiation, and transparency, investability and discipline.
Clarity of theme
When we speak to investors about thematic funds, in many cases it is clear that they have done their research – specifically, their research on the overall theme.
If they are talking about artificial intelligence, for example, they know exactly why they are interested in that particular mega-trend as opposed to another.
In this case it is therefore important to ensure that the thematic fund in question is clearly exposed to AI. The investor will want to see various indications as to how the strategy defines AI and whether there is a focus on companies that produce AI solutions or simply those that mention or use AI, which can be quite different.
Expertise
There is a clear demarcation between strategies that seek to ‘codify’ expertise versus those that seek to provide expertise.
Strategies that codify expertise will write different rules that define how stocks will be selected and then weighted.
There would be very little flexibility to go off the pre-defined criteria, but at times these criteria can be extensive.
Strategies that provide expertise will tend to recognise that it would not be possible to pre-define all possible conditions, and that there should be subject matter experts informing the stock selection and weighting.
What’s defined is that the expert will use their knowledge to inform a process, but how that knowledge is used is not perfectly defined. It might differ from company to company or business model to business model.
Purity of exposure
There is no perfect way to assess ‘purity’, but looking out for certain signals can help.
In a hypothetical scenario, one strategy that indicates a focus on a mega-trend has 400 holdings while another focusing on the same mega-trend has 40 holdings.
Which is more ‘pure’? It’s not perfect science, but we believe the one with 40 holdings offers a greater degree of selectivity.
The more companies one includes, the greater the risk that they include business models that merely tangentially touch on the mega-trend, just like they tangentially touch on many other things.
The company that mentioned the mega-trend on the most recent earnings call, for example, is the opposite of the pure-play whose every moment is focused on bringing that mega-trend forward.
Differentiation
There are two dimensions to differentiation: differentiation against benchmarks and differentiation against other mega-trend strategies.
