Why long-term history matters less in thematic investing

In this corner of investing, established asset managers and benchmark heavyweights aren’t always favoured

Why long-term history matters less in thematic investing

With shrinking hurdles to investment-fund development and rising interest in trends like ESG, it should be no wonder that thematic funds have prospered in recent years.

Unlike other strategies that might rely on hedging or an intense focus on short-term market movements, thematic funds represent a conviction about the far-flung future. As such, a successful thematic strategy requires those at the helm to understand long-term political, economic, and social trends and how they converge to create investable opportunities.

Another difference between thematic investing and other approaches is in the importance of historical performance. A case in point can be seen in a new report issued by Cerulli Associates.

The report noted how Natixis Investment Managers launched Thematics Asset Management in March this year. Thematics’ Paris-based team operates a high-conviction, long-term approach with an emphasis on ESG, as expressed in its first four funds.

Those funds, Cerulli noted, closely mirror those offered by Pictet Asset Management, a veteran firm when it comes to thematic strategies. Someone who looks at the top 10 holdings in the Thematics Water fund in June 2019, for example, can easily recognize that eight of them were also in the Pictet Water fund. That raises an important question: why would thematic investors choose a newcomer asset manager’s fund over one offered by a firm with decades of thematic investing under its belt?

As Cerulli said in its report, it depends on the individual’s reason for investing in a thematic fund. Pictet’s products feature a “purity” overlay, which requires that a company must derive a significant percentage of its revenues and profits from the theme or activity that a particular fund focuses on. On the other hand, Thematics follows a more material approach; after diving into the specifics of businesses within a certain theme, it determines which are the most likely to become leaders and bases its decisions on that evaluation.

Thematic investors must also avoid falling for the mirage of short-term hype. Newton Investment Management, a well-known entity in the thematic strategies space, is one example noted by Cerulli. The firm takes note of a range of global investment themes — categorized into economics and policymaking, innovation, and people — that it says can “help to block out distracting ‘noise,’ manage risks, and identify the attractive opportunities which can generate long-term returns.”

From a certain perspective, past performance can be a source of noise for thematic investing. While a record of gains can be reassuring for current and potential investors in a specific company, it doesn’t guarantee future success. Among theme-focused funds, past winners don’t typically get special consideration during portfolio construction, which means benchmark heavyweights typically do not get included. The result, Cerulli said, is heightened risk — and a need for investors to exercise patience.

“It takes time for the themes to play out,” Cerulli said. “The reward is a benchmark agnostic, high-conviction investment portfolio, focused on those businesses that will dominate their fields in the 2020s and beyond.”


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