One in five advisers are adding thematic equities to multi-asset portfolios, representing a minority among their peer group, a FT Adviser poll suggests.
Nevertheless, the straw poll also indicated that advisers are almost even on whether or not thematic equities have a role in multi-asset portfolios at all.
More than half of respondents said they already add thematic equities to a multi-asset portfolio (18 per cent), or would consider doing so (36 per cent). Less than half (45 per cent) said they would not.
Thematic investing, as defined by index provider MSCI, is a top-down investment approach that relies on research to explore macroeconomic, geopolitical and technological trends.
“The themes we like for the long-term include the digital economy, with the ongoing transition of economic activity into the virtual world, and the dominance of certain increasingly monopolised companies in this area,” said David Jane, a fund manager in Premier Miton’s macro thematic multi asset team.
“Our energy transition theme includes businesses that benefit from the growth of alternatives to fossil fuels in the electricity markets, currently with a focus on nuclear generation,” he added.
“We also have a long-term emerging consumer theme, which is currently benefiting from the growth of India. And a major recent theme has been the deglobalisation/reshoring theme, which concentrates on US industrial business and capex beneficiaries.”
The thematic element has many advantages, according to Jane, one of which is adding an extra dimension of return on top of macro drivers. “The themes can be longer term and consistent over time, and to some degree can be independent of the macro ebbs and flows in markets.
“In essence, by exposing the equity portfolio to a range of long-term ongoing trends we can bias the funds to success, in addition to our value added in asset allocation.”
But in the shorter term, investors should be aware that thematic equity strategies can have a return stream which differs significantly from that of a broader market capitalisation-weighted benchmark index, said Raul Leote de Carvalho, deputy head of the quantitative research group at BNP Paribas Asset Management.
“The difference arises from the fact that thematic funds invest only in the few companies exposed to a given theme, thereby introducing not only the risk related to the exposure of their businesses to the theme - which is expected to generate a premium - but also potentially creating systematic portfolio biases resulting from overweighting some sectors, regions and styles.
“When adding thematic investments to multi-asset portfolios, investors should invest in multiple themes, choosing an allocation that diversifies away their systematic biases as much as possible,” de Carvalho suggested.
“While this can be attempted using naïve approaches, it is more efficiently done with risk management and portfolio optimisation methods that shuffle the allocation of all assets in the portfolio so that the sector, region and style biases remain unchanged after adding the thematic investments.
