Thematic investing is about seizing opportunities from economic and social long-term secular trends, and not about playing short-term cyclical swings within an economic cycle.
Today's big themes include energy, wealth creation, healthcare, commodities, real assets and sustainable investing. They are widely known and well covered by the investment community. Although, the success of thematic investing depends on three factors; firstly, on properly defining the theme; secondly, on choosing profitable themes rather than "hot topics"; and finally, on implementing a defined investment strategy in a professional way.
The importance of defining the theme can be demonstrated with the "energy theme". A big part of the MSCI World Energy Index, for example, is made up of traditional energy companies like Exxon, Shell and BP.
However, these companies do not actually benefit from the "energy super cycle", due to their mature asset base and necessity to invest in the renewal of their resources. Yet, certain oil and gas producers who are active in some of the most resourceful regions, or many companies active in renewable energy or energy efficiency, deliver substantial returns. However, these companies are not part of the MSCI World Energy Index.
This shows that traditional investing in sectors and industries according to broadly used universes and benchmarks may not achieve the objective of theme investing.
Sector and country themes, 10-yr
Source: Financial Express Analytics
Thematic investing should also not assume that a certain "hot topic" or secular growth trend will automatically lead to superior investment returns. The internet bubble is a good example. Internet businesses have not been profitable for many companies, even though the web has grown into an essential part of everyday life.
It is important to consider the potential for a theme to generate profit, not just the growth of that sector. For example, the luxury industry offers both growth and profitability.
Investing in luxury stocks exposes investors to the fast and secular growth of consumer wealth in emerging markets such China, Russia and India. Hunger among status-conscious consumers for exclusive brands like Hermès, Cartier or Omega is here to stay. Strong profitability for such long standing companies is therefore expected.
Last but not least, the successful implementation of investment strategies in defined themes is pivotal to realise their inherent return potential.
An active approach is important for thematic investing. Even within the most promising themes, there are winners and losers that can change frequently, especially in themes investing in emerging market growth. The success is directly linked to the portfolio manager's stock-picking expertise, making extensive experience in the individual theme essential.
Scilla Huang Sun is manager of the Julius Baer Luxury Brands fund. The views expressed here are her own.