What are thematic funds and which ones are popular with investors?
A thematic or megatrend fund is a type of investment fund (mainly equities), whose portfolio is built by focusing on the main trends that move the world economy. These types of funds do not follow the economic cycle, but rather seek to detect themes with long-term potential to invest in them.
Europe leads in thematic investing: 90% of fund selectors invest in megatrends
After surveying 90 fund selectors, the Broadridge study, carried out on behalf of AXA Investment Managers, concludes that there are significant regional differences in thematic investing. Europe leads the ranking with 90%, followed by Asia-Pacific with 80% and North America with 70%. Globally, assets in thematic funds currently exceed 572,000 million euros, a figure that is expected to continue increasing. Until 2018 their annual growth was 37%, but it has skyrocketed in recent years, reaching 77% in 2020.
Thematic investing has become a must for the main fund selectors. In order to understand and standardize the categories that belong to this type of investment, Broadridge has created a classification into five macro groups: sustainability, emerging tech, changing consumption, healthy living and multi-theme. This classification aims to solve one of the main issues when we talk about thematic investment: the non-existence of standardized and shared categories or themes at a global level.
These macro groups are divided into subcategories. You can see the topics that make up each group below, as well as the percentage they represent.
Source: Broadridge Thematics Analysis 2021
If we analyze the investment data by micro themes, we will see that the regional differences in the weight of total thematic investment are even more pronounced. Multi-sustainable funds are predominant in Europe, whereas tech sector funds are more popular in North America and Asia-Pacific. The graph below shows the micro themes with the highest investment in each region.
Source: Broadridge Thematics Analysis 2021
Investing in thematic funds has gained momentum in recent years. In total, thematic portfolios have represented almost 40% of net sales of equity funds since 2017. Without a doubt, the pandemic has played an accelerating role in their growth and has fueled other new trends, contrary to the most critical forecasts that state that thematic funds are only capable of raising funds in a bull market.
Profitable in the short term, but only 2 out of 10 funds are successful in the long term
The success of short-term thematic funds is unquestionable. According to Morningstar‘s Global Thematic Funds Landscape 2021 study, more than 66% of them outperformed global equity markets. But if we extend the time frame, they begin to falter noticeably. Taking 15 years as a reference, their success rate drops to 22% and only 43% of the funds survive.
Source: Morningstar
This chart shows that the success rate decreases with time, a fact that must be considered when incorporating this type of funds into our investment portfolio. If you are interested in the universe of thematic investing and want more information, please check the links to the reports that we have used to elaborate this article.
