The key to investing in the ‘next big thing’ within the thematic fund universe is deciphering the difference between a passing fad and a sustainable driver of returns.
This is advice from Emma Wall, head of investment analysis and research at Hargreaves Lansdown, who says: “Thematic investing identifies a particular sub-sector of the market, often gaining momentum or popularity, with differentiated drivers such as clean energy, robotics or agricultural technology.
"Mega-trends are broader structural socio-economic drivers, with global impact, such as ageing populations and digitalisation. The most popular thematic funds with Hargreaves Lansdown investors currently are around clean energy and environmental trends – funds that profit from the global move towards a less carbon-intensive economy.”
As the world emerges out of the Covid crisis, many countries face challenges brought on by demographic changes and social and political conflict. So could the social theme be the next big thing within thematic investing?
Social trends
As Morningstar explains it, themes in the social bucket deal with structural changes in society. These themes may be politically oriented or focus on demographic changes.
Among the themes included under this broad social theme are cannabis, consumer, demographics, political, post-Covid, security and wellness.
BlackRock’s thematic think tank, Thematic Research and Investment Group, which drives research, development and launch of new themes, also sees the social theme as a key one.
Increasingly, more countries and corporations are issuing ‘social bonds’ globally, which are used to finance projects that will have a positive social influence.
Haresh Raghwani, wealth manager for Craufurd Hale Wealth Management, agrees that the social theme is on the rise.
He says: “Social trends will become more popular, however at the moment these are not mainstream and they need to be taken with a pinch of salt. Cannabis funds for example are not widely available and are very high risk as cannabis is not widely legal in every country.
"If we consider the US, it is not legal in every state. Cannabis funds cannot be listed in the US unless they sell outside the US. This type of sector has a high sensitivity to political risks, the legislation could change.
“If we consider other social trends such as consumer healthcare, this will only grow. China has the second biggest healthcare market, however, they spend less than a third of what the US spends. China will continue to have a growing population and in turn an ageing population.
As technology drives wealth creation, more people will expect better access to quality of life. This is an area that will require improvement. The general healthcare message is prevention is better than a cure.
Political influence
Investors in thematic funds also need to consider the interlinks between themes as they are not immune from political tensions and more than one theme can be affected during times of conflict.
