Thematic investing set to transform asset management?

Foreword

Thematic investing is no longer niche. Assets in these funds have grown at an annual rate of 37% since 2018, but the unprecedented events of 2020 in the wake of the COVID-19 pandemic significantly boosted this growth to a massive 77%. In all, since 2017 thematic portfolios represent almost 40% of all equity fund net sales.

Asset managers have always tried to identify trends. But thematic investing – building a portfolio around companies benefitting from long-term economic, political, or societal structural shifts, rather than a sector or geographical region, is rapidly rising.

As the global economy evolves, it has become increasingly important to understand not only the challenges that the world is facing but how the way we live and work is changing. These megatrends – digitalisation, changing demographics, the rise of ESG and more – have increasingly influenced the way that we view the world and where we see potential opportunities to invest.

Investors are increasingly trying to understand how thematic funds fit into broader investment portfolios, and how introducing these strategies will influence portfolio construction. For these reasons, we have commissioned this research to explore the evolution of thematic investing, and the compelling case around these strategies being a mainstream investment approach.

AXA IM has a long history of thematic investing, in the conviction that such strategies can provide investors with access to superior growth potential. What’s more, we believe it has become evident that many companies can no longer be classified fully according to traditional sector or industry classifications, as many of today’s market leaders operate across multiple business lines – creating new investment opportunities.

We also believe that such thematic strategies can help investors future-proof their portfolios, by identifying the companies which are best positioned for long-term changes. A thematic approach enables investors to have potentially better visibility on the future trajectories of companies, rather than focusing on the shorter-term macro noise or investment flows which can be unpredictable over the long run.

Many of the ways in which the world has changed because of the pandemic are here to stay - and the evolution of the global economy was already gathering pace before 2020. We believe that these fundamental shifts have changed the face of investing in a new and exciting way which can offer investors the potential for superior long-term investment returns.

Summary

1. Fund selectors often think thematically

When fund selectors are invited to describe the future, they often articulate their predictions in a thematic manner. Across the world, they say that new ways of thinking are necessary. The world has changed and old approaches, such as looking at opportunities by sector, are now becoming less useful. Fund selectors want to explore investment opportunities in ways that suit the methods they use to think about both the commercial and wider world. Thematic funds are an appropriate response to this demand.

2. A diverse but coherent landscape

The thematic investment landscape is diverse and complex, but we believe that it can be organised into segments that are intuitive and useful. We identify five macro groups of thematic strategies: sustainability, emerging technology, changing consumption, healthy living, and multi-theme.

3. The rise of thematic investing

The thematic funds that we track globally contained assets of €572bn at the end of 2020. The largest region is Europe followed by Asia Pacific. The largest theme is emerging tech followed by sustainability. Thematic fund assets have grown at an annual rate of 37% since 2018. In 2020 they grew by 77%. There has been significant demand for ‘multi-sustainable’ funds in Europe. In North America and Asia Pacific emerging technologies such as disruptive tech, AI & robotics, and a range of others such as security/cybersecurity, fintech, semiconductor, connectivity and
digitalisation opportunities have dominated. What we think we are seeing is a deep-rooted evolution in demand for thematic investments based on fundamental and considered changes which will remain with us for some time.

4. COVID-19 – a powerful tailwind

The global pandemic has had the effect of significantly accelerating many of the trends within the thematics universe, according to fund selectors. More than that it has prompted new ones. Thematic funds have proven their resilience during COVID-19 – unlike many other types of funds, they are capable of raising assets in a market downturn.

5. A considered place in the portfolio

Fund selectors use thematic investment approaches in varied, well-informed and thoughtful ways. Thematic funds are seldom employed as a core element within portfolios. Selectors tend to see thematics as a global, strategic approach. They favour active management for well- articulated reasons. Thematics funds often replace traditional geographically or sector-based approaches. The presence of institutional investors in this market offers additional evidence that the trend towards a thematic approach is part of a fundamental and carefully though change being made by all types of investor.

6. A rigorous due diligence approach

Fund selectors apply added controls within their selection processes when assessing thematics, further evidence of their considered approach. They have a clear idea of the qualities they value and the potential pitfalls.

7. Thematics has the potential to transform asset management

What is the potential for thematic investing to influence the future development of the asset management industry? Well, it has already had a dramatic impact – since 2017, this corner of the industry has represented 39% of all equity fund net sales. It is not unreasonable to think it will continue to play an important role.