Thematic investing: How You Can Capitalise On Megatrends For High Growth

This article was contributed to us by Sheng Shi Chiam, CFA, Personal Finance Lead at .

As technology advances faster than ever, it also accelerates the pace of innovation across every aspect of our lives. Tiny semiconductors, made from transistors smaller than a strand of human DNA, now have the potential to power our data centres that store the billions of YouTube videos we collectively watch every day. Facebook’s (NASDAQ:FB) recent Meta rebrand, as a declaration to push the frontiers of virtual reality, has evolved from an absurd notion to something increasingly rooted in people’s expectations of future digital interactions.

One thing remains true: our world will continue to be shaped by these key transformative trends that will redefine the way we live, work and play. As retail investors, it might be difficult to consistently identify and pick out the winners in this fast-evolving space. But sometimes, you can have your cake and eat it too. With thematic investing, investors now have a strategic way to closely align themselves with top trends for favourable investment outcomes.

In this article, we take a look at thematic investing — what it is, why it has gained popularity with investors today, and also some of the opportunities and challenges that come along with it.

What is thematic investing?

Thematic investing, or megatrends investing, is an investment strategy that focuses on seeking opportunities in predicted and enduring long-term trends as opposed to selecting investments that bet on specific companies. These trends are typically those related to enduring macroeconomic, societal, and technological trends that lead to broader structural shifts in how we will live, and not those based on short-term swings and investor fanfare.

These trends can also be categorised into different themes, such as healthcare innovation, environmental resources, urbanisation, and many others. For example, the topic of sustainable investing has been increasingly important to the investors of today, and its encompassing themes would likewise be relevant to this.

Thematic funds strategically align on broader, enduring themes

Conventional sector investing primarily focuses on one particular sector. For example, a real estate sector fund would primarily focus on companies involved in the residential or commercial real estate sector. Conversely, thematic funds have a much greater breadth of diversification as they typically consist of companies across different sectors, but all tied to a common underlying theme.

If you take a look at the Thematics Meta Fund, for example, you will see a diverse range of sectors comprising equities of companies that fall under Thematics Asset Management’s AI & Robotics, Safety, Subscription Economy, and Water strategies. The fund is also not constrained to a specific region, allowing investors to gain exposure to equity markets on a global basis. Overall, thematic funds generally provide for a far better breadth of diversification as compared to sector-focused funds.

Why has thematic investing become more popular with investors recently?

Over the past couple of years, thematic investing has gained significant momentum with investors. Beyond providing long-term exposure to the positive trends and structural shifts that are shaping our world today, thematic investments also provide opportunities to:

Invest in the future you believe in — Thematic investments allow you to invest in a future you believe in. Technology has transformed the world drastically over the years, and the future will be very different from what it is now. Think about how Electric Vehicles (EV) will eventually impact the way we travel daily. While there is still much to be said about the amount of investor fanfare ascribed to pure play EV companies like NIO (NYSE: NIO), Tesla (NASDAQ: TSLA) or Rivian (NASDAQ: RIVN), there is certainly no denying that automobile companies have been turning to electric solutions faster than ever, and this is also priced into higher valuations for EV stocks. With other varying themes such as AI & robotics or clean energy, thematic funds create access to investable opportunities of the future.

Gain early exposure to hidden gems — At its core, thematic investing is about identifying trends and companies that will fundamentally change the world. Recognizing linkages to these trends earlier provides greater potential for investors to experience higher growth in the stock prices. For example, innovation investor Cathie Wood’s ARK ETFs gained popularity in light of their early bets on winning stocks like Square (NYSE: SQ) and Tesla (NASDAQ: TSLA), making multibagger gains in their companies.

Position sustainability at the forefront of your investments — Most importantly, sustainability is positioned as one of the core principles of thematic investments. Many investors prioritise sustainable investing, and thematic investing precisely allows for them to be positioned for the long term. This inclination has also been accelerated by the global pandemic, as the world witnessed how important ESG related topics like healthcare innovation or societal wellness have become.

Overall, thematic investing is here to stay, and there will be more focus on it than before. But with so many different possible themes available, how can an investor approach this strategy?

How should we identify themes that are relevant and enduring?

While each fund has its own unique strategy, themes are generally systematically evaluated based on the extent of their structural impact, the potential for upside, and finally, breadth of diversification. The table below provides a simple summary of how this is done.

Extent of Structural Impact — Themes must firstly have the ability to remain a long lasting trend that will positively impact our world. These themes should neither be cyclical in nature nor part of short-lived hype trends. For example, companies that the Thematics Safety Fund focuses on include those in future-proof areas such as cybersecurity, digital payments and data centres, positioning you for exposure to important technological trends.

Potential for Upside — Themes should also consist of related companies with a potential for upside and continuous growth. Have these companies produced any valuable and groundbreaking solutions? Does this theme have a sufficient universe of companies with solid business fundamentals and valuations? These are just some of the questions that should be asked when narrowing down possible themes.

Breadth of Diversification — Lastly, the identified themes should also be well diversified in terms of its scope and mix of underlying sectors. A lack of diversification would mean a lack of meaningful allocations across different trends, but too much will also lead to a loss of appeal to investors compelled by a targeted theme.

Challenges faced by the everyday retail investor

In addition to the lack of client-first solutions, we also noted several key challenges commonly faced by retail investors in the current nascent thematic investing landscape:

Themes can be a hit-or-miss — How do you pick out the winning themes and star players? As much as some of these trends are important, not all of them are guaranteed winners. A theme like healthcare might seem like a good option given their defensive nature, however, more than 90% of these start-ups actually fail to produce approved drugs. Rather than identifying them yourself, it might be more prudent to stand on the shoulders of giants and rely on the strategies and due diligence of time-tested fund managers.

Difficulty in picking single up-and-coming stocks with multi-bagger potential — How often do we find multibaggers like Tesla (NASDAQ:TSLA) or AMD (NASDAQ:AMD)? Even as we zoom in on a particular bullish theme of technology or sustainability, there are thousands of companies out there in the investable universe, and it is not every day that investors are able to find opportunities with stellar returns.

Confusion and lack of choice with ETF investing — As more investment firms race to churn out investment solutions to ride on the back of thematic investing, investors have become not only spoiled for choice, but also increasingly confused and overwhelmed with the selection available. ETFs from established fund managers like BlackRock or Schroders might not always be readily accessible to the retail market, while more specialised thematic firms like Global X have more than 190 different options available, which is perhaps too much for comfort when trying to make an informed decision.

With the all new Endowus Megatrends Portfolio, you can now get started easily!

For an optimal thematic investing experience, investors need access to wealth solutions that are built upon solid due diligence, backed by credible research, and constructed with only best-in-class thematic funds. With this in mind, we sought to develop a client-first solution, and are proud to introduce our all new Endowus Megatrends Portfolio.

As a key part of the Endowus Core-Satellite Investment Strategy, our Megatrends Portfolio gives you the opportunity to tap into the biggest future-driven themes impacting global markets. The portfolio is deeply aligned to strong structural growth opportunities, those focused on improving the quality of life and making positive social change.

The Endowus Megatrends Portfolio is a 100% equities portfolio aimed at achieving high growth expectations through global themes backed by strong structural trends. Consisting of six best-in-class funds spanning the major themes of Healthcare, Technology, Industrials, and more, investors might be most drawn to this portfolio for its attractive potential growth, diversification and differentiation factors.

What’s more, the portfolio introduces new funds previously unavailable to the Singapore retail market, and are managed by Alliance Bernstein, Allianz, BlackRock, Schroders, and Thematics AM — all leading specialists in thematic investing. You can also learn more about thematic investing in our deep dive Insights article here.

Disclaimer: Investment involves risk. Past performance is not a guarantee to future returns, and the value of investments and the income from them can go down as well as up. Please refer to our full disclaimer here. This article has not been reviewed by the Monetary Authority of Singapore.

If you’re interested to start investing with Endowus, you’ll be happy to know that DollarsAndSense readers can enjoy $20 off their access fee till (equivalent to $10,000 advised free, assuming an Access fee of 0.40%). Sign-up using this link to claim this special offer. Terms & Conditions apply.