Actively Managing a Multi-Theme Portfolio

The best opportunity for generating alpha may no longer be found in managing relative exposures around a standard benchmark index, but reside in identifying profound and sustainable technological, demographic, social and economic changes that will lead in a new generation of wealth creation.

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    Actively Managing a Multi-Theme Portfolio

    Actively Managing a Multi-Theme Portfolio

    In a recent white paper, Thematic Investing: Turning Insights into Alpha, we discussed how the best opportunity for generating alpha may no longer be found in managing relative exposures around a standard benchmark index, but reside in identifying profound and sustainable technological, demographic, social and economic changes that will lead in a new generation of wealth creation.

    We also discussed the challenges of thematic investing, chief among them the need to get multiple decisions right (i.e., the right theme, the right stocks and the right timing).

    Since no investor (or money manager) will ever be 100% right at all times, diversification is crucial to achieving sustainable success with thematic investing. Thematic investing diversification doesn’t stop, however, at multiple holdings for a single theme. Indeed, the smart execution of a thematic investment strategy involves the diversification of themes.

    Discipline Matters

    As investors embrace thematic investing, it’s significant to note that these investments have tripled their share of all equity funds globally in the last decade, with approximately $800 billion in assets. Whether investors have profited from this trend is an entirely different matter since assets have typically flowed into thematic funds at or near the top of the market for individual themes.1

    As a result, according to one study, thematic ETFs have underperformed broad-based funds by about 300 basis points.2   This underperformance is not an indictment of thematic investing. Instead, it illustrates the previous point regarding the importance of timing an investment in a particular theme.

    While this form of investing is built around the idea that there are mega-trends that have the potential to provide investors with substantial capital appreciation, returns do not come in a steady pattern over many years. Rather, themes are subject to periods of excessive enthusiasm that can lead to overvaluation and inordinate pessimism (or neglect) that can result in periods of substantial undervaluation, which is why diversification and timing are so critical.

    The Answer? An Actively-Managed, Multi-Theme Solution

    One potential answer for investors in addressing the challenges of thematic investing is American Portfolios’ ThemeCatcher ETF Strategy Quantitative Tactical Portfolio.

    ThemeCatcher provides investors exposure to emerging high-growth investment themes, using momentum analysis that shifts portfolio exposures between offensive and defensive buckets to profit from upward price momentum, while managing the short-term downside risks of thematic investing.

    Offered by Nine Points Investment Management, ThemeCatcher is a unique and more sustainable way to exploit the profit potential of thematic investing. Rather than selecting a single theme or fixed universe of themes in which to invest, the portfolio is managed to reflect the realities of the thematic investing space by dynamically managing the portfolio’s holdings with the objective to extract this subsector’s full alpha potential.

    Multi-theme investing focuses on long-term trends where there may be potential for long-term appreciation.  With this type of investment on the upward swing, diversification in themes should also play a role in consideration.

    Sources:

    1. https://www.ft.com/content/1db0f968-2175-4434-ba65-c57632b51e02
    2. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3765063

    Please reference disclosures: https://blog.americanportfolios.com/disclosures/

    About The Author

     

    Manager of Due Diligence 
    800.889.3914, ext. 136 

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