Thematic investing involves structural trends that are expected to significantly impact economies and redefine business models. For this reason, they should have an impact on the returns and risks of investments with greater exposure to those trends.
They can add a dimension in portfolios that transcends asset classes, sectors, regions and investment styles.
Constructing portfolios with thematic investments requires adequate risk management so that investors can assess by how much a given theme is exposed to traditional risk factors, sectors or styles, and how much alpha a given theme is likely to add to the portfolio.
In ALLOCATING TO THEMATIC INVESTMENTS – An investment rationale for institutional investors, we consider five themes:
- energy transition
- environmental sustainability
- healthcare innovation
- consumer innovation
- disruptive technology.
What is the appeal of thematic investing?
It is well known that a broad stock market index can outperform sovereign bonds over time. However, it is typically the case that a small number of stocks generate most of the returns of the index. This is partly due to some companies being better positioned to take full advantage of transformative change in society, so we believe it is sensible for investors to focus on themes representing such change.
In this paper, we propose a framework for allocating to themes while taking into account the expected returns from the various assets and the expected alphas for the themes.
The paper includes a detailed example of an allocation to equities and bonds for the five themes and show how the allocation changes according to an investor’s level of risk aversion.
Read ALLOCATING TO THEMATIC INVESTMENTS An investment rationale for institutional investors
