What is Thematic Investments 101

Investing in the stock market is very simply a game of strategy. Investors adopt various strategies based on factors like their investment horizon, their openness to risk (also known as their risk appetite) and their earnings targets.

One of the strategies adopted typically by long term investors, is thematic investing. This type of investing is seeing a growing uptake among all categories of long-term investors.

What is thematic investing?

As the name suggests, thematic investing is linked to distinct investment themes. These themes are often linked to megatrends that are emerging in the world – not the economic world or the stock market world specifically – but the world at large. The idea is for investors to park their money in such a way that they make the most of the changes that they impact in the world. Thematic investment is sometimes defined differently – some investors see it as investing according to themes that are represented by various sectors. Others even see thematic investment as a consumer-behaviour-governed style of investing. We will touch upon these other two definitions of thematic investment too in the course of our post here today. However, for the largest part, we’re going to look at thematic investing in its megatrends investing avatar.

What is the mindset of a thematic investor pursuing megatrends?

Examples of megatrends out there include the changing face of transport, the world’s aging population and the robotics revolution. A thematic investor asks himself questions like: Given the changing face of transport, should I only invest in auto stocks if the auto company in question has plans for building electric cars? Similarly the thematic investor pursuing the ‘older population’ megatrend will ask themselves: Should I invest in Pharma stocks since seniors are likely to depend more heavily on medication and pills for their overall wellbeing? What old-fashioned companies will robotics disrupt? Which new ones will it create? Asking these questions will help investors to jump on to a trend early and ride the wave to good earnings, rather than trying to jump aboard when the upswing is already… well… in full swing.

What megatrends must I look at?

Besides the trends mentioned above, here are some other megatrends that investors might consider pursuing

1. Clean Energy
2. Digital Security
3. Gig Economy
4. Nutrition
5. Agribusiness
6. Emerging Markets In Asia and Africa

You might know of or notice some others linked to your particular line of work and there might be many others that we have not included on this list. Either way, megatrends are something that will change the way the world works.

What caution needs to be practiced before investing in megatrends?

Thematic investing gives investors the incentive and the push to plan ahead. At the same time, investors need to research the companies that they are investing in, keep regular tabs on them and keep a finger on the pulse of the megatrend in question. It is all good to invest in the next big thing, but keep in mind that that’s exactly what people were doing when they invested in bogus (or failing or plain fake) dotcom companies in the 80s. Watch your step and invest in companies with proper, published financial records. Invest in megatrends that you can understand and track.

Also keep in mind the fact that there is a huge difference in investing in a company that is currently in business responding to an existing market, already delivering returns and investing in a completely new fangled business. It takes a level of foresight and an ability for financial and business evaluation that might not come to non-economists. And there’s the fact that you cannot see the future. Will there really be electric cars or will something else just come along and take the world by storm? Do not lose sight of the bigger-than-usual risk here. Of course, you’re also looking at potentially larger earnings in the long run but do consider your risk appetite and diversify your portfolio.

In diversification of your portfolio is absolutely imperative when investing in megatrends because already one of your investments is focussed wholly on one sector. As a result, make sure your other investments fall into other sectors. If you’re investing in the pharma megatrend, make sure your other investments go to other sectors that seem ripe to you, for example.

How can I opt for thematic investment?

At this stage it might be sensible to stick with large cap stocks if you are confident enough to map a direct investment route when it comes to megatrends. However, since a lot of study is required to find out whether the companies dabbling in megatrends are really worth the investment, it might make sense to invest indirectly.

1. ETFs that track emerging markets or emerging trends

Exchange Traded Funds, abbreviated as ETFs are a sort of hybrid investment that bring some qualities of mutual funds and some qualities of stocks to the table. An ETF – very much like a mutual fund – invests in stocks, bonds and debentures. Now this is very different from a stock. When you buy a stock you’re buying shares of a company and that company basically just carries out its own business. ETFs are however very much like stocks in the fact that they are traded all day long on the stock market, unlike a mutual fund which is traded just once a day.

2. Mutual funds that track emerging markets or emerging trends

If ETFs are still a little more risk than you’re willing to take you can always identify and invest in mutual funds that give you a little exposure to these megatrends. You’ll be able to tell from the fund’s name.

3. Try thematic investment based on current trends or sectors

Some thematic investing may be based on current consumption and consumption in the near future. If you do not want to invest in trends that might come to fruition too far into the future, you might want to consider what some invest call ‘thematic consumption funds’. Now these funds focus on specifically consumer-facing companies (so no B2B companies here) and the funds evaluate the companies’ potential based on consumer behaviour.

Alternatively sometimes, funds that focus on the infrastructure sector are also termed as thematic investments – fair enough, their theme is after all infrastructure.

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