Up Next How to Invest in Change: A Guide to Thematic Investing – Visual Capitalist

The world is undergoing structural economic changes at a rapid pace.

Technological breakthroughs and scientific discoveries that used to take decades are happening in years, and shifting demographics and climate change are causing upheaval around the globe. With the onset of Industry 4.0 and constantly shifting capabilities and consumer priorities, the global investment landscape is transforming as well.

How do you prepare for this transformation? This graphic from MSCI highlights thematic investing, its characteristics and benefits, and how themes are constructed and utilized.

Thematic Investing: Characteristics and Benefits

The key to thematic investing is a thorough understanding of megatrends.

Megatrends are long-term structural trends that can have a transformative effect on global economies, in areas of high disruption and innovation and with significant growth potential. These can include transformative technologies like driverless vehicles and 5G-enabled robotics, or societal changes like an aging society.

As megatrends solidify, they also become increasingly important drivers of earnings and equity returns. Investors traditionally have partial exposure to these themes as part of a portfolio’s growth allocation, but thematic investing allows for specific themes to be targeted in a more focused way.

Characteristics of Thematic Investing

  • Secular Trends: Focuses on long term political, economic, technological, and social trends.
  • A Changing World: Captures trends that reflect how the world is changing.
  • Sector Independent: Cuts across countries and traditional sectors.
  • Security Selection: Identifies companies with exposure to different target themes.

All together, these characteristics allow thematic investing to complement traditional portfolio design by enabling investors to take active control of themes impacting their portfolios.

Benefits of Thematic Investing

  • Gives investors exposure to long-term structural trends.
  • Positions portfolios relative to long-term risks and stranded business models.
  • Provides exposure to several themes that can be quantified, analyzed, and managed.

Thematic Investing In Action

Over the past decade, thematic investing has gained traction across financial circles.

In 2015, the global thematic fund market was estimated at $155 billion assets under management (AUM). By 2020, the market had grown to $426 billion AUM, with thematic ETFs growing at an impressive 20% CAGR over the five-year time span.

As the leading provider of global investment indexes, MSCI constructs thematic indexes that directly capture megatrends using a comprehensive rules-based methodology. They include indexes focused on the digital economy, efficient energy, genomic innovation, and the food revolution.

Here’s how MSCI creates a thematic index:

  1. Build a clear expression of the theme to capture the key trends.
  2. Identify aligned business activities incorporating expert insights.
  3. Map products, services, and concepts linked to the theme in a consistent, rules-based approach using Natural Language Processing (NLP).
  4. Establish economic linkage between companies and theme, measured by relevance scores.
  5. Select and re-weight stocks using relevance scores.

Breaking Down a Theme

Through a broad understanding of megatrends and their sub-themes, the use of NLP allows MSCI to comb through company descriptions and business line items to ensure (and measure) total thematic coverage.

For example, the Future Mobility theme is broken down into sub-themes of batteries, smart mobility, sharing economy, high speed transport, and vehicle automation.

From there, each sub-theme is further broken into key concepts that highlight key players in the market, such as batteries being broken down into battery packing, charging infrastructure, recycling, and technologies.

There’s a flux of emerging technological, macroeconomic, and geopolitical megatrends that have already started to unfold. Thematic investing is all about defining tomorrow’s investable trends and impacting your portfolio today.

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