What Drives Thematic Investing

The world is evolving at record pace. The innovation and emergence of megatrends is causing many investors to seek out long-term structural growth themes and packaging them into actionable investment ideas for their portfolios.

Thematic investing refers to an emphasis on long-term macroeconomic trends in an attempt to capitalize on major technological, societal, and other changes expected to take place around the world.¹

The Three M’s of Thematic Investing

There are a wide variety of investment themes, but what are the forces that drive the emergence of these themes? At a high level, we believe the primary drivers behind investment themes can be broken down into three categories: modernism, megatrend and morality.

Modernism

The need for speed and innovation has become a new benchmark. As a result, many investment themes are being founded in modernism. COVID and the work-from-home era have been a perfect example of this. Two global needs were put into play in 2020: develop a COVID vaccine and keep people working.

Numerous advancements in technology and healthcare ensued. The pandemic forced people to adjust to a new way of life. While many are eager to see some of the trends that have become quintessential to the pandemic go away, some of these trends may remain, such as video communications, electronic signature platforms, streaming services and many others. These advancements that were made in the name of keeping up, have created new investable trends.

Megatrends

What is the difference between a trend and a megatrend? Some trends, while very popular, may not be investable, or there may be potential threats to the longevity of the trend. Megatrends carry a much larger footprint. These trends permeate across multiple industries and change the way they operate, permanently. The birth of these megatrends fosters a potential playground for thematic investors. While traditional sector investing provides investors with exposure to specific sectors, thematic investing can provide exposure to multiple sectors, simultaneously. Thematic investing cuts across the traditional sector lines to align with the end objective of the theme at hand.

Esports and video gaming have been recent megatrends. Users are using gaming as both a source of entertainment and means of socializing. This trend far exceeds investing in companies within the video game industry. It is also impacting streaming, news and entertainment as well, creating a broad theme for investors to potentially participate.

Morality

ESG— or environmental, social and governance—investing is an example of when morality and investing intersects. The way the world thinks about the environment and the need to protect it has changed. Extensive amounts of research and advancements have been made in environmental science, highlighting the need and urgency for sustainability. More households are recycling, using reusable bags and turning away from plastic products. We are seeing this same change on a governmental level through the passing of more legislation. Governmental involvement signals a large societal shift. In the case of ESG, it not only signals that this initiative is being supported, but it also mandates that this is the new standard. New industries and investment themes are introduced, as a result.

Investors have the ability to incorporate thematic investing within their portfolios through a variety of methods. Some investors may choose to invest directly in a company through the purchase of stocks. Other investors may choose an approach that can help mitigate risk, by purchasing a basket of securities that align with a particular theme, through an investment vehicle such as an ETF or mutual fund. As with many aspects of investing, maintaining balance is key. Investors must do their due diligence to distinguish between long-term trends versus the pitfalls of short lived fads.