Sharp increase in global interest rates pegged as root cause of demand drop
This year, investors are withdrawing significant amounts from global theme funds as their interest in these assets, the majority of which are highly associated with economic growth, wanes.
According to a report from Reuters, over the last couple of years, investors flocked to these funds as they invested in high-growth industries and equities related to popular trends like work-from-home, climate change, and artificial intelligence.
The demand for thematic funds has decreased as a result of the year's decline in growth stocks and the swift global increase in interest rates.
Morningstar reports that the first half of this year saw a record outflow of US$6.3 billion from thematic funds, as opposed to a record inflow of US$142.9 billion during the same period last year.
At the end of June, their net assets also decreased to US$616.9 billion, a 24% dip from the previous year.
In contrast to a record 234 thematic funds launched during the same period last year, these declines have led fund houses to introduce just 65 thematic funds in the first half of this year.
Richard Gardner, chief executive officer at financial services firm Modulus Global, said, "Thematic funds are known to be among the riskiest categories of mutual funds, in part because it restricts the opportunities available. It prohibits the fund from investing in stocks that are not related to the theme."
"In a bear market, investors tend to be incredibly risk averse. So, it is only natural that thematic funds would see lessened interest."
The MSCI World index has fallen by 15% this year, while the ETF All-Stars Thematic Composite index, which includes stocks related to popular themes like fintech, sustainability, and healthcare innovation, has down by 28.76%.
After providing an average return of 30% over the previous three years, the Global Robotics Automation index ETF has fallen 26.84% this year.
The MJ ETF, which tracks international cannabis stock prices, has decreased 46.8% so far this year.
According to Morningstar data, robotics and automation funds experienced outflows totaling US$1.6 billion in the first half of this year, whereas fintech and digital economy funds experienced net sales of roughly US$1.3 billion apiece.
At the end of June, cannabis funds' net assets fell to US$1.3 billion, a 68% decrease from the prior year, while fintech funds' assets fell to US$8.6 billion, a 60% reduction.
Thematic funds frequently experience a spike in investment after their initial substantial run-ups, which, although being profitable investments, causes investors to sell at a loss, according to some analysts.
Only 22% of U.S. theme funds survived and outperformed the broad global markets index during the past 10 years, according to a Morningstar research. Nearly 60% of these funds have closed.
"In 2021, more than two thirds of thematic funds underperformed the Morningstar Global Markets Index," Morningstar said. "This is a sharp reversal from their stellar showing in 2020, highlighting the volatility that goes hand in hand with thematic investing."