🏆 How Leaders Define the Thematic Investment Universe
Understanding how industry leaders identify and categorize the trends shaping the future
In my last newsletter, we explored the concept of secular growth trends and how they drive long-term investment opportunities.
This week, we take a closer look at how industry leaders define and structure the thematic investment universe to navigate these transformative trends. Investing in thematic opportunities often feels like stepping into uncharted territory. Yet, global asset managers, ETF providers, and thought leaders have established frameworks to identify and define the thematic investment universe. These frameworks help investors navigate the complex web of trends and allocate capital to the most promising opportunities.
Putting Your Money Where the Trends Are
But simply recognizing these trends isn't enough. The next step is finding the right investment vehicles to capitalize on these opportunities. There are three main ways to gain investment exposure:
Individual Stocks: Later this year, we'll delve into this approach in future newsletters, exploring how to identify well-positioned industries, find dominant companies in these industries, and benefit from secular growth trends via investment exposure.
Funds: These are professionally managed portfolios that offer a convenient way to invest in a diversified basket of securities aligned with a specific theme.
ETFs: These are exchange-traded funds that track a specific index or sector, offering a low-cost and transparent way to invest in thematic trends.
For the coming weeks, we'll focus on the fund and ETF investment landscape. These investment products offer a targeted approach to capturing the growth potential of specific themes, allowing you to align your portfolio with the megatrends shaping the future.
Disclaimer
This newsletter is for informational purposes only and should not be considered investment advice. All investments carry risk, and past performance is not indicative of future results. Please consult with a financial advisor for personalized recommendations.
Navigating Thematic Investments
To navigate the world of thematic investing effectively, it's essential to have a clear understanding of how these funds are categorized. Let's take a cue from the leading financial players and examine their approach to classifying thematic investments.
Morningstar's Taxonomy
Morningstar, a leader in investment research, has created a system to organize funds, called the "Thematic Fund Taxonomy."
Morningstar's top-level categories are:
Technology
Physical World
Social
Broad Thematic
This is a good first step. "Technology" and "Social" should be key clusters. "Physical World" seems to include environmental themes and other concepts.
Refining the Approach
While Morningstar's taxonomy offers valuable insights, I'll be applying a slightly more focused approach. In my view, a true thematic fund should meet two key criteria:
Global Reach: It should invest in companies across the globe, capturing the growth potential of themes that transcend geographical boundaries.
Multi-Sector Approach: It should invest across multiple sectors, recognizing that transformative trends often impact various industries.
This perspective might lead to some deviations from Morningstar's classification, particularly when it comes to funds with a narrow or regional focus. Additionally, I'll be steering clear of niche themes that might not offer a sufficiently broad and robust investment universe, such as cannabis or hydrogen.
By applying these criteria, I aim to provide you with a curated selection of thematic fund peer groups that truly reflect the dynamic and evolving thematic investment industry.
To further refine our understanding of thematic clusters, let's examine how leading asset managers structure their product offerings and segment the market. Several asset managers offer a broad selection of thematic investment funds, with a significant portion of these vehicles holding over $1 billion in assets under management—a strong indicator of market relevance and investor interest. These key players include:
Pictet,
BNP Paribas,
Robeco, and
iShares.
By analyzing their approaches, we can gain valuable insights into how these sophisticated investors categorize and approach thematic opportunities.
This analysis will provide a practical perspective on thematic clusters, complementing the theoretical framework provided by Morningstar's taxonomy.
Learning from the Leaders
Pictet's Megatrend Framework
According to Morningstar's research, Pictet is the leader in thematic investing. They are unique in their collaboration with the Copenhagen Institute for Futures Studies, which provides a theoretical foundation for their thematic investment strategies. The "Pictet Megatrend Framework" is organized into six clusters:
These clusters encompass:
Technology and Science,
Environment,
Global Governance,
Demography,
Economy, and
Society.
While comprehensive, this framework acknowledges that investment strategies often touch upon multiple clusters, which can make categorization challenging.
However, a statement from Pictet aligns more closely with my thinking:
"In other words, the approach seeks to transform long-term technological, environmental and societal megatrends into investment opportunities."
This brings us back to the core clusters of:
Technology,
Environment, and
Society.
BNP Paribas' Clusters
BNP Paribas is another leader in thematic investing, boasting a comprehensive product suite and several blockbuster funds.
BNP Paribas employs a similar clustering approach but appears to break down "Environment" into "Energy Transition" and "Environmental Sustainability." Additionally, they divide "Social" into "Health and wellness" and "Equality and inclusive growth."
Robeco's Perspective
Robeco, a dominant player in the thematic investing field, launched its first thematic strategy 25 years ago. While their overview primarily lists their investment strategies, a statement from Robeco resonates with my approach:
"Companies benefiting from these structural changes in consumer preferences, technological innovation and governmental regulations possess substantial competitive advantages."
This highlights the categories of:
Consumer,
Technology, and
Governmental Regulations.
While the "Governmental Regulations" category is somewhat ambiguous, it likely refers to the increasing scrutiny and regulations related to environmental and social factors.
iShares' Megaforces
Finally, let's consider iShares, a passive player with an impressive product suite. As an ETF provider, iShares can quickly launch new strategies and gauge investor demand, which explains their broad offering.
iShares refers to secular growth trends as "Megaforces" and clusters them into these categories:
Demographic Divergence: This complex name aims to capture the investment implications of an aging population and the rise of the emerging middle class.
Digital Disruption and Artificial Intelligence: This category encompasses your typical technology investments, including a semiconductor ETF.
Geopolitical Fragmentation and Economic Competition: This includes ETFs that benefit from population growth and the increasing desire to re-establish critical local infrastructure.
Future of Finance: This category focuses on fintech, Bitcoin, and blockchain investment themes.
Low Carbon Transition: This category includes clean energy and other environmental themes.
Establishing Our Framework
Having reviewed various approaches to classifying thematic investments, it's time to draw some conclusions and establish our own framework.
A common thread among all the major players is the presence of a "Technology" cluster. Whether it's labeled "Technology and Science," "Digital Disruption and AI," or simply "Technology," this category consistently appears in various forms.
Similarly, an "Environmental" cluster is prominent in most frameworks, often encompassing themes like energy transition, resource management, and sustainability.
The third cluster is less clear-cut. Contenders include "Consumer," "Social," and "Demographic Divergence." While BNP Paribas includes "Equality" in this category, I tend to view that as more of an ESG (Environmental, Social, and Governance) factor rather than a distinct secular growth trend.
For our purposes, let's establish the following fourmain clusters:
Multi Theme
Technological
Environmental
Societal
This framework provides a balanced and comprehensive approach to categorizing thematic investments, capturing the key megatrends that are shaping the world today.
Looking Ahead
I would say the first true thematic category of investment funds and ETFs is Water. Pictet pioneered this space, but others quickly followed. Let’s take a quick look at how the Water funds of all our thematic leaders have performed since inception compared to the broader equity market (measured by the MSCI All Country World ETF, also known as "ACWI").
Have a look at the Flourish animation, there 2 key takeaways:
Every single thematic Water fund/ETF from our “Thematic Leaders” has managed to deliver outperformance compared to the broader equity market ("ACWI"). If a strategy consistently adds value over such a long time horizon, we can confidently state that these are well-structured investment products.
It’s interesting to note that the thematic leader in asset terms is also the "winner" in our little Water case study. The Pictet Water Fund turned a $1,000 investment in 1999 into more than $6,500.
The Water segment is one of the oldest and most established megatrend pockets, but it remains just a small piece of the pie. As you can see in the image below, there are many more super-interesting segments.
Source: Flourish
In my upcoming newsletters, I'll take you deeper into the world of thematic clusters. I’ll guide you through the process of establishing peer groups within each cluster and analyze:
Which investment funds/ETFs delivered the best performance in 2024,
Which ones took a breather, and
What the key drivers were behind these market moves.
Here's a sneak peek at the main peer groups within each cluster:
Mutli-Theme: Disruptive Innovation, Sustainability / ESG
Technological: Digitalization, Robotics and AI, and Automation
Environmental: Climate, Water, and Clean Energy
Societal: Security, Infrastructure and Luxury
(Note: Multi-Theme are investment vehicles with a wide scope, touching more than one thematic cluster)
Publication Timeline Ahead
We have six exciting weeks ahead of us! First, we’ll take a close look at the broader stock market in 2024, which will help put things into perspective. This will be followed by a thematic cluster deep dive, week by week. Here’s the schedule:
📊 2024 Market Review: The Big Picture Before Diving Deeper – Feb 20
💡 The Magnificent 7 Effect: How It Distorts Performance & What Defines ‘Good’ Returns – Feb 27
🌍 Multi-Thematic Investing in 2024: Which Funds/ETFs Are Winning? – March 6
🚀 Tech Funds/ETFs in 2024: Capturing Innovation or Falling Behind? - March 13
🌱 Sustainable Investing in 2024: How Funds/ETFs Are Performing in the Green Transition – March 20
🔄 Investing in Societal Change: How Thematic Funds/ETFs Are Adapting in 2024 – March 27
This deep dive will equip you with a comprehensive understanding of the stock market and thematic investment universes, enabling you to make informed decisions when selecting funds or ETFs for your portfolio.
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