Written by Ryan Hitchcock (Financial Advisor, High Point Capital Group, Milwaukee, WI)
Thematic Investing - Buzzword or the Real Deal?
Thematic Investing has recently become a popular phrase, going hand-in-hand with terms like “disruption” or “innovation." This is most likely due to certain fund managers who have become quite high-profile around the topic. Overall, our industry has a lot to say about it both on the good side and on the bad side. Therefore, I'd like to weigh in on this concept too...give a little background from what I see, and finally decide if it's a buzzword or the real deal?
I'm not one for anticipation so, to me, the answer is yes it is a buzzword (or buzz phrase?). It's disappointing as I personally like the concept behind thematic investing. To clarify, I believe it's a buzzword since everywhere you look we see these words from investment professionals, financial advisors, hedge funds, you name it they are using this “theme” as a ploy to catch people's attention. For example, I recently saw an e-mail that was talking about traditional bonds using phrases like "disruptive bond holdings for investors desiring innovation”, it's simply a bond.
I like the concept of "thematic investing," we do it all the time. As an investor, you are putting your money into something you believe is going to continue to grow and keep up with the fast-paced society we live in. Investing your money in tech companies, oil & gas companies, us stock market indexes are all examples of "themes" you choose. Thematic investing is nothing new and is not limited to disruptive or innovative ideas.
What is "Thematic Investing"
There are two levels of thought when it comes to themed investing (and you're not going to be surprised by the below answer):
Passive thematic investing is picking a general index fund like the NASDAQ 100 index as an easy example. You are taking a very high-level, top-down approach and building your thematic investments this way.
Active thematic investing is looking for companies that fit your specific criteria such as a specific industry, technology, or geographic location, and building a portion of your portfolio bottom-up. The majority of thematic investing in today's conversation is this type of investing.
My Take on Thematic Investing
I find Thematic investing appealing and actually do utilize it in my own business. I find If you invest in areas you are passionate about, and have a clear understanding of that area of investment, it will help you in dealing the ups and downs of investing. You must remove emotions or biases towards certain investments, but if you believe the area, or industry you choose to be a "thematic investment" and you believe it has good growth potential, then why not invest in it. Certain sectors of the economy are going to grow faster than others partake in greater growth rates you should have some exposure to such industries in your portfolio. I prefer to allocate a modest percentage of the entire capital to those that I believe will expand at a quicker rate.
What I do for a common investment allocation is to use small percentages of the overall capital towards the themes I believe are going to be these faster growing parts of the economy in the near to longer term future. I could probably do a full episode on how to do this. I believe these allocations will drive the growth or what we call alpha of a portfolio over time. I try to drive the performance of a benchmark. For this to work you must be involved and research these themes, segments, sectors, or whatever you want to call them, as you want to pick the right one. You can really drill down through the use of ETF's, stocks, or very specific desires of your theme.
Take a Deeper Dive
As I mentioned, you have to be very involved and aware of what's going on in these industries if you want to use thematic investing as an approach to investing. If you only use the headline buzzwords such as "innovation" or "disruption" to guide you on your thematic investing journey, you may be investing in something you don't know what's going on behind the scenes.
To counter this, I put together a series of podcast episodes profiling specific industries I like and think have good future growth potential. In each episode, I interviewed real-life experts in that specific industry. Experts who work day-in and day-out inside those industries to gain from their experience directly. My hope was to provide a unique perspective outside the world of the notice and headlines of thematic investing today.
Industries covered: Cybersecurity, CBD, Real-Estate, eSports & Gaming, Automation & Robotics, & JanSan.