Thematic investing has gained significant traction amongst investors. In our annual professional investor survey, an impressive 92% of investors indicated that they allocate capital to thematic strategies. Total assets under management (AUM) globally in the thematic space now stands at $554.2 billion as of end of November 2024.
Thematic Strategies: An Established Investment
The appeal of thematic investing is undeniable. Technology advancements, demographic shifts, or sustainability initiatives can drive growth over long periods of time and create the giants of tomorrow. This allows investors to align their portfolios with long-term trends, invest early in future winners, and potentially yield substantial returns.
Over the last few years, more and more investors have turned to thematic strategies, with exchange-traded fund (ETF) strategies proving a popular investment vehicle for thematic exposures: nearly a quarter (24.7%) of investors exclusively use ETFs and just over a quarter (25.2%) use both ETFs and active funds.
The Paradox of Choice
Despite the enthusiasm for thematic strategies, several barriers hinder effective allocation. One of the most significant challenges is the number of themes themselves (and then the number of available strategies for each theme). Over 21% of survey respondents cited ‘too many strategies to choose from’ as a key barrier. It appears the overwhelming variety can lead to analysis paralysis.
Theme selection and allocation can be further complicated by timing. Identifying the right theme to invest in and the right moment to overweight or underweight that theme can be challenging. This difficulty is echoed in the survey results, where nearly 19% of professional investors expressed concerns about existing products following fads rather than sustainable trends.
Thematic strategies with a high market overlap can also cause problems within a portfolio. A lack of differentiation can dilute the intended benefits of thematic investing and its diversification potential. High overlap between themes can also be an issue when constructing a multi-thematic portfolio: 20.44% of investors noted that they often encounter too much overlap with existing portfolio allocations when considering new thematic investments. This overlap can lead to unintended risk concentrations and hinder overall portfolio diversification.
The Case for Multi-Thematic Strategies
Given these challenges, delegating thematic investment decisions to a specialised manager may be a prudent approach. Multi-thematic strategies allow investors to tap into various themes without the burden of selecting individual themes or timing their investments perfectly. Multi-thematic strategies can provide a one-stop shop solution to investors and offer a more diversified exposure, while mitigating some risks associated with single-theme investments.
Single-theme strategies saw a period of dominance between 2019-2021, which led to the proportion of thematic assets invested in multi-thematic strategies dropping to 10% at the end of 2021. Since then, multi-thematic strategies have had a resurgence, and now account for 17.5% of all thematic assets.
Conclusion
Thematic investing presents an exciting opportunity for professional investors seeking to capitalise on long-term trends. However, the complexities surrounding theme selection, timing, and portfolio overlap make it a challenging endeavour. As such, delegating these responsibilities to a multi-thematic strategy may prove more effective in navigating the intricacies of thematic investing while maximising potential returns.
IMPORTANT INFORMATION
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
[1] WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.
[2] Source: WisdomTree, Morningstar, Bloomberg. All data as of 30/11/2024 and based on WisdomTree's internal classification of thematic funds. Performance is based on monthly returns from Bloomberg and Morningstar. Historical performance is not an indication of future performance, and any investments may go down in value.
[3] WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.
[4] WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.
[5] Ibid.
[6] Ibid.
[7] Source: WisdomTree, Morningstar, Bloomberg. All data as of 30/11/2024 and based on WisdomTree's internal classification of thematic funds. Performance is based on monthly returns from Bloomberg and Morningstar. Historical performance is not an indication of future performance, and any investments may go down in value.