Thematic investing

Chapter 1: Intro to thematic investing

Hey there! Welcome to the exciting world of thematic investing. This isn’t just about picking stocks or putting your money into some random index fund.

It’s about investing in the future, in trends, and in ideas that are transforming our world. So, are you ready to take a peek into the future with us?

Let’s go! ???♀?

Understanding thematic investing

So, what’s thematic investing all about? Well, in simple terms, it’s about focusing on broader, ‘macro-level’ trends that are expected to shape our society and economy over the coming years or even decades.

This could include everything from artificial intelligence ??, clean energy, and e-commerce, to ageing populations and changing dietary habits.

With thematic investing, you’re not just buying a piece of a company. You’re buying into a story, a vision of the future. It’s a bit like being a sci-fi author, but instead of writing novels, you’re crafting your investment portfolio. Fun, right?

Thematic investing vs traditional investing

Alright, let’s take a minute to compare thematic investing with traditional investing. In traditional investing, you’d typically choose investments based on their individual characteristics, like a company’s earnings or the economic outlook of a specific country or industry.

Thematic investing, on the other hand, looks at the bigger picture. Instead of focusing on individual companies or sectors, it identifies powerful, cross-cutting trends that could drive the growth of many different companies across various industries and regions. It’s like switching from a microscope to a telescope!

For instance, if you were investing in the ‘clean energy’ theme, you wouldn’t just be looking at energy companies. You could also be investing in electric car manufacturers, battery producers, companies building energy-efficient appliances, and much more.

Think of it this way: traditional investing is like picking out individual trees, while thematic investing is about seeing the entire forest — and the ecosystem around it! ??

The origins and evolution of thematic investing ??

Now, let’s take a step back and look at how thematic investing has evolved over the years. It might seem like a trendy buzzword, but it’s actually been around for quite some time.

Thematic investing started to gain popularity in the 1970s and 1980s as investors began to recognise the potential of long-term societal and technological trends to drive economic growth.?

However, it wasn’t until the 2000s, with the rise of the internet and rapid technological advancement, that thematic investing really took off. ??

Remember the dot-com boom (and bust) of the late 1990s and early 2000s? That was a classic example of thematic investing (though admittedly, it was also a lesson in what can go wrong when hype outpaces reality).

More recently, we’ve seen massive interest in themes like clean energy, artificial intelligence, and remote work technology—trends that have only accelerated due to the COVID-19 pandemic.

Interestingly, according to a report by PwC, assets in thematic funds grew by an astounding 61% in the first half of 2020, reaching a total of $595 billion. So, it seems like thematic investing is here to stay! ??

Wrapping up ??

So there you have it, a glimpse into the fascinating world of thematic investing. It’s about thinking big, imagining the future, and investing in trends that have the potential to change the world.

It’s not just about making money; it’s about being part of something bigger. And who knows, with the right knowledge and a bit of luck, you might just spot the next big trend before everyone else does!

In the next chapter, we delve deeper into the different themes you can invest in and how to spot a promising trend. ??

Chapter 2: Decoding themes in investing

So, let’s decode the themes in investing. These themes are like sneak peeks into the future, helping us understand where the world is heading and where the biggest opportunities might be.?

Are you excited? Because we sure are! Let’s get started! ??

Exploring the various themes: Riding the wave ??

Thematic investing is all about identifying and capitalising on trends that are set to reshape our society and economy. These themes can be diverse, cutting across sectors, and varying from technological advancements to climate change and demographic shifts. Here’s a closer look at a few key themes:

1. Technological advancements: This theme captures the groundbreaking innovations that are disrupting traditional industries.

Think about artificial intelligence (AI), which is transforming everything from healthcare to finance, or the Internet of Things (IoT), which is changing how we interact with the physical world around us. Companies at the forefront of these trends could be great investment opportunities. ??

2. Climate change and sustainability: As the world grapples with the effects of climate change, there’s a growing focus on sustainability. This has given rise to the ‘green economy’ theme, which includes everything from renewable energy and electric vehicles to sustainable agriculture.

Companies that can help us transition to a more sustainable future could see significant growth. ??

3. Demographic shifts: Changes in population trends can also create investment opportunities. For example, the ‘ageing population’ theme focuses on the growing number of elderly people in many countries, creating opportunities in healthcare, senior living facilities, and other related sectors. ????

The importance of megatrends ??

In the world of thematic investing, megatrends are the big, powerful waves that can carry you to impressive returns (if you catch them right). These are long-term, transformative trends that affect multiple industries and regions.

For example, digitalisation is a megatrend that’s been going on for decades. It’s led to the rise of e-commerce, digital payments, remote work technologies, and much more. Companies that have been able to ride this wave — like Amazon, Shopify, and Zoom — have seen enormous growth.

Understanding these megatrends can give you valuable insights into the future and help you identify investment opportunities before they become mainstream.

It’s like having a crystal ball…well, sort of! ??

Case studies of successful thematic investments ??

Sometimes, the best way to understand something is to see it in action. So, let’s look at a few examples of successful thematic investments:

1. Tesla and the electric vehicles: Tesla is a perfect example of a company that capitalised on the ‘electric vehicles’ theme. Early investors who recognised the potential of this trend have seen extraordinary returns. In fact, if you’d invested $1,000 in Tesla’s IPO in 2010, your investment would have been worth over $500,000 by the end of 2020! Quite a ride, isn’t it? ????

2. Beyond Meat and plant-based foods: The shift towards plant-based foods is another exciting theme. Beyond Meat, a company that makes plant-based meat substitutes, has benefited from this trend. In the initial years since its IPO in 2019, its stock price had seen significant growth, rewarding investors who spotted the potential of this trend (although the company is going through tough times lately). ?????

3. Zoom and remote work: The COVID-19 pandemic accelerated the trend towards remote work, and no company embodies this theme quite like Zoom Video Communications. In the space of a few weeks, Zoom went from being a relatively unknown tech company to a household name. In 2019, Zoom’s revenue was about $622.7 million, but by 2020, it had skyrocketed to approximately $2.65 billion. Early investors who recognised the potential of the remote work theme have reaped significant rewards. ??

4. Shopify and e-commerce: Shopify has been riding the e-commerce wave for years. It offers a platform that allows businesses of all sizes to set up online stores, making it a perfect fit for the ongoing shift from brick-and-mortar retail to online shopping. If you had invested $1,000 in Shopify’s IPO in 2015, your investment would have been worth over $100,000 by the end of 2020. ???

5. NextEra Energy and renewable energy: NextEra Energy is the world’s largest producer of wind and solar energy, making it a poster child for the renewable energy theme. As countries around the world strive to reduce carbon emissions, companies like NextEra Energy could stand to benefit. The company’s stock has consistently outperformed the broader market over the past decade, making it a shining example of successful thematic investing. ??

6. Square and digital payments: Square has revolutionised the payments industry by allowing businesses to accept card payments using just a smartphone or tablet. This fits perfectly into the digital payments theme, which has gained momentum as consumers move away from cash and towards digital and card payments. Since its IPO in 2015, Square’s stock price has seen impressive growth, underscoring the power of this trend. ??

These are just some examples of trends that eventually materialised. Of course, riding a thematic wave doesn’t mean that each individual company will forever continue to be successful, as idiosyncratic factors play their role as well!

Wrapping up ??

Decoding themes in investing is a bit like being a detective, looking for clues about the future and figuring out which trends have the potential to reshape our world. It’s exciting, challenging, and yes, a little bit risky. But with careful research and a bit of foresight, it may be a rewarding approach to investing.

In the next chapter, we explore the pros and cons of thematic investing! ??

Chapter 3: The pros and cons of thematic investing

We’ve seen different themes and how they can be critical in shaping the future of the world and why not… your investment portfolio.

Let’s dive deep into the nitty-gritty of thematic investing. As with all investment strategies, thematic investing comes with its fair share of pros and cons. Let’s unravel them together, shall we? ???♂?

The bright side ??

Potential for high returns: Thematic investing can be incredibly rewarding. When you spot a trend early and invest in companies set to benefit from it, you position yourself to ride the wave of growth. Remember our chat about Tesla and the electric vehicle trend? Those who jumped on that bandwagon early on have been laughing all the way to the bank. ??

Flexibility: Thematic investing isn’t bound by traditional classifications like sectors or geographies. It allows you to invest across industries and regions, following the trend wherever it leads. This can give you a broader range of potential investments and help diversify your portfolio. ??

Alignment with personal beliefs: Many themes align with societal changes that you might feel strongly about. For instance, investing in the renewable energy theme allows you to support a transition to cleaner energy sources. It’s a great way to put your money where your mouth (or heart) is. ??

The flip side ???

Now, let’s talk about the risks and challenges because every rose has its thorns, right?

Market volatility: Themes can be influenced by a host of factors, including technological changes, regulatory shifts, and global events (remember the remote work trend sparked by the pandemic?). This can lead to significant market volatility. The key is to stay focused on the long-term trend rather than getting swayed by short-term noise. ????

Prediction errors: Predicting the future is tough, and even the best-laid plans can go awry. You might think a trend is the next big thing, but it could fail to take off or take longer than expected. For instance, the ‘dotcom bubble’ of the late 1990s saw many internet companies crash and burn when the hype failed to translate into profits. ??

Concentration risk: If you invest heavily in a single theme and that theme doesn’t pan out, your portfolio could take a significant hit. Diversification is key here – spread your bets across different themes and also consider other types of investments. ??

Thematic investing vs. other investment strategies ??

So, how does thematic investing stack up against other investment strategies?

Compared to sector investing, thematic investing is more flexible and can provide exposure to broader trends. For instance, the ‘digital payments’ theme includes companies from various sectors, including tech (like Square) and financial services (like Visa).

On the other hand, index investing – where you invest in a broad market index – offers more diversification and can be less risky. However, it might also offer lower potential returns compared to successful thematic investing.

Ultimately, the best strategy depends on your risk tolerance, investment goals, and personal beliefs. There’s no one-size-fits-all approach to investing – and that’s part of what makes it so interesting, right? ??

Wrapping up ??

Thematic investing is like a rollercoaster ride – it can be thrilling and potentially rewarding, but it also comes with its share of twists and turns. As always, remember to do your own research, stay diversified, and keep your eyes on the prize: achieving your long-term financial goals. ??

Till next time, keep those investment vibes high, and remember: patience is a virtue in the investment world! ??

Enough with the theory - in the next chapter, we discuss how to build your own thematic portfolio!

Chapter 4: Building a thematic portfolio

Ready to build a portfolio that’s not just about the here and now, but also about the ‘what could be’?

Welcome to the world of thematic investing. Let’s dive into how you can construct a thematic investment portfolio step-by-step.

Step 1: Identify and research investment themes ??

Building a thematic portfolio starts with identifying potential themes. This involves a bit of forecasting and a lot of research. Remember, themes can come from anywhere - technological innovation, societal shifts, environmental changes, or even regulatory reforms. Think electric vehicles, clean energy, digital payments, and remote work.

How can you spot a theme? It starts by staying informed. Read widely, listen to podcasts, attend webinars, and keep your ear to the ground. Once you’ve identified a potential theme, research it. Understand what’s driving it and which industries or sectors could be impacted.

Take, for example, the rise of artificial intelligence (AI). It’s being driven by advances in technology and increasing amounts of data. Companies developing or using AI - think tech giants like Google and Microsoft, or even smaller innovative firms - could benefit from this trend. ??

Step 2: Selecting suitable investment instruments ??

Once you’ve identified a theme, the next step is to figure out how to invest in it. There are several ways you can do this:

Individual stocks: You can invest in individual companies that are poised to benefit from the theme. For example, if you’re convinced that electric vehicles are the future, you might pick a company like Tesla. Just remember, investing in individual stocks can be risky, so do your due diligence. ??

Exchange-Traded Funds (ETFs): ETFs are a basket of securities that you can buy or sell on an exchange, just like a stock. Thematic ETFs let you invest in a range of companies connected to a particular theme. For instance, the WisdomTree Artificial Intelligence UCITS ETF gives you exposure to companies involved in the robotics and AI theme. ??

Mutual funds: Similar to ETFs, mutual funds can offer exposure to a specific theme, but they’re typically actively managed and may have higher fees.

Remember, different investment instruments come with different levels of risk, so choose wisely.

Step 3: Diversification and risk management ??

When building a thematic portfolio, don’t forget the golden rule of investing: diversification. Even if you’re super excited about a theme, don’t put all your eggs in one basket. ????

You can diversify within a theme by investing in different companies or sectors. For example, if you’re investing in the AI theme, you could invest in tech companies developing AI technologies, but also in industries where AI is being applied, like healthcare or automotive.

But also diversify across themes. Maybe invest in the electric vehicle trend, but also consider others like clean energy or digital payments.

And remember, thematic investing should form part of a diversified portfolio that includes other assets like bonds, traditional equities, or even real estate. It’s all about finding the right balance for your specific risk tolerance and financial goals. ??

The final lap ??

Building a thematic portfolio is a journey, not a sprint. It takes time, research, and careful planning. But it’s also an exciting way to align your investments with the trends shaping our world. Coming up next… how to evaluate the performance of your thematic portfolio.

Chapter 5: How are your themes doing?

Once you’ve built a thematic portfolio, it’s crucial to regularly evaluate its performance. Let’s jump into how you can navigate through this exciting roller coaster ride. ??

Monitoring your thematic investments ??

After setting sail on your thematic investing journey, the first thing you need to do is keep an eye on the performance of your investments. This isn’t just about looking at the numbers – although that’s important too – but understanding what’s driving those numbers.

Say you’ve invested in an ETF that tracks the clean energy sector, like the iShares Global Clean Energy UCITS ETF. You’ll want to regularly check how this ETF is performing, but you’ll also want to follow the broader clean energy sector. ??

Look at how clean energy companies are performing and keep track of the latest clean energy technologies. News articles, earnings reports, and industry analyses can be great sources of information.

And don’t forget to keep an eye on the broader market and economy too. Sometimes, macroeconomic factors like interest rates or geopolitical events can impact your thematic investments.

Adjusting or exiting a theme ?

One of the tricky things about thematic investing is knowing when to adjust or even exit a theme. Themes can take time to unfold, and it can be hard to tell whether a dip in performance is a temporary setback or a sign that the theme isn’t panning out as expected.

Consider the electric vehicle (EV) trend. If there’s a setback – say a critical battery technology fails – EV stocks might take a hit. But does this mean the EV theme is no longer viable? Not necessarily. It could just be a bump in the road. ???

That said, there could be times when you need to adjust or exit a theme. Maybe the theme has run its course, or perhaps it hasn’t unfolded as expected. This is where regular monitoring and analysis come in handy.

The life cycle of a theme ??

Like everything in life, investment themes go through a life cycle. They’re born, they grow, and eventually, they mature. Understanding this can help you manage your thematic portfolio.

Let’s take a trip down memory lane and look at the internet boom. In the late 1990s, the internet was a budding theme. As it gained momentum, dot-com stocks soared. But when the dot-com bubble burst in 2000, many of these stocks crashed. Yet, out of that rubble emerged today’s internet giants like Amazon and Google. ??

The lesson? Don’t just jump on a theme because it’s hot. Understand the life cycle of the theme and be prepared for volatility.

Evaluating the performance of your thematic portfolio is not just about watching numbers go up and down. It’s about understanding the story behind those numbers and being patient enough to let that story unfold.

Let’s wrap it up, shall we?

In this learning guide, you’ve learned:

?? Thematic investing focuses on broader, long-term trends that shape our society and economy, providing opportunities to invest in the transformative forces shaping the world.

?? It allows investors to buy into a story or vision of the future rather than just individual companies, providing a sense of purpose and impact beyond financial returns.

?? Thematic investing can offer potential high returns and flexibility, while aligning with personal beliefs, making it a compelling investment approach for those seeking both financial and values-driven outcomes.

?? However, it comes with risks such as market volatility, prediction errors, and concentration risk, requiring careful analysis and risk management to navigate successfully.

?? Building a thematic portfolio requires identifying and researching investment themes, selecting suitable investment instruments, diversification across themes and within each theme, and regular monitoring and evaluation to adapt and optimize the portfolio over time.?

Until next time, keep your investment spirits high, and never stop learning! ??

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As always, when investing your capital is at risk. This information does not constitute advice nor a recommendation. You should consider your own personal circumstances when making investment decisions.

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