Any thematic misstep relative to other market players can be instantly punished with negative performance.
Thematic investors don’t see the world in a way that means they are overweight Japan, underweight industrials, or believe the euro is going to 1.20 or that oil should be at $120. Rather, the goal of thematic investing strategies is to target specific trends that can extend across sectors and borders, whereas a generalist global equity investor will seek precisely this geographic and sector diversification.
The investment process can be lengthy
Aware of this difference in approach, thematic investors must become true investment engineers who know their companies, their managers and their vision perfectly. Any thematic misstep compared to other market players, generalists or ETFs can be immediately punished by negative performance.
However, this process can sometimes be time-consuming, as it is difficult to find a good new idea at the optimal trading moment in a theme’s lifecycle. This raises the question of why everyone in the financial industry – brokers, clients and prospects – seems to focus on three-year performance. Perhaps this is because the majority of stock sales forecasts in the world expire after three years, while the value of any investment lies primarily in the future cash flows in the following years (terminal value).
Often the purity of a theme is reflected in the market capitalization of the companies they hold.
Good news for active thematic strategies
This is where long-term equity analysis becomes crucial: knowing that a company has been identified outside of a standard regional, sector or valuation framework deserves special attention. This is especially true as more and more money flows into passive investments, which are primarily momentum-driven and clearly oriented towards the short term. Market and valuation distortions can result, hence the need for a refined but regular investment process for thematic strategies. The good news for active thematic strategies: the larger and more pronounced the distortions, the better the opportunities.
A lot of alpha can be generated without being tied to an investment
Thematic investing also generates a lot of non-investment alpha. CIOs, who are in touch with what’s moving the world today and in the future, are always ready to hear a sophisticated, well-analyzed variation and an explanation of it. Often, the purity of a theme is reflected in the market cap of the companies they own. Imagine a new theme, a new supply chain, different customer bases, new regulations. It’s very likely that large caps don’t fall into this category, and in that case it would be hard to have a view that is significantly different from the market.
Qualitative themes of the future will include more social aspects
That said, not all themes need to be a new fad, focus on trendy products, or experience the unimaginable. Some themes may be more quantitative or evolve around new ways of structuring markets, information flows, valuations, or factors. The qualitative themes of the future will incorporate more social aspects of life and will ideally be global in nature to avoid the omnipresence of benchmarking issues.
