Thematic Investing: Turning Insights into Alpha
The pace of economic and technological change is accelerating at the fastest pace in human history. The significance of this rapidly-changing landscape is as obvious as it is profound. From an investment perspective, the accelerating pace of change forces investors, advisors, and money managers to consider whether a relative investment framework tied to an index […]
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Thematic Investing: Turning Insights into Alpha
The pace of economic and technological change is accelerating at the fastest pace in human history.
The significance of this rapidly-changing landscape is as obvious as it is profound. From an investment perspective, the accelerating pace of change forces investors, advisors, and money managers to consider whether a relative investment framework tied to an index largely comprised of old-economy stalwarts will remain relevant amid successive waves of economic and technological revolution. This is where thematic investing comes into play.
What is Thematic Investing?
Rather than attempting to generate alpha through the overweighting or underweighting of individual securities relative to an index, thematic investing looks to generate alpha by identifying broad social and technological trends that are expected to drive above-market growth in the stocks that benefit from these trends.
A thematic investment can take on two distinctive approaches:
- Cyclical themes: By definition are of short- or medium-term duration. Outperformance is unlikely to be sustained over longer periods of time since its cyclical nature tends to make such investments mean reverting.
- Structural themes: Singular, permanent shifts in the existing landscape. These themes, which are often based on disruptive technologies, changing demographics, or shifts in consumer behaviors, have the potential to provide much longer and more profound outperformance.
In this white paper, “Thematic Investing: Turning Insights into Alpha,” we define it, discuss the different approaches to investing in themes, explore the varied ways to execute on a thematic thesis, and highlight the advantages and potential pitfalls inherent in this type of investment.
