Thematic Investing: Unlike any seen before!

The traditional way of identifying a good investment is to analyse the historical data and make predictions for the future however, it is equally important to prepare for a future that may look completely different. It might involve making decisions based on ideas rather than just facts.

So, what is thematic investing?

Human originality drives innovation!
Thematic investing is an organized and rigorous approach required to recognize investable themes and be able to prioritize them. This involves human customization for making up the portfolio.

A mere response to transformations!
Thematic Investing is relatively independent of the economic cycles. In this way, there is no requirement of developing a strategy that will lead to an increase in the portfolio return rather it is about identifying, for instance; a new technology seeing widespread adoption, a country transforming from a traditional plant to a new plant, a transformation from physical cash payments to mobile payments.

Thinking long-term!
In the present world, there exist economic imbalances such as demand greater than supply or pandemic situations like COVID-19 that lead to global economic imbalances. Innovation driven by human originality and cognizance of tackling imbalances in the global economy creates growth that hasn’t yet been recognized in share prices.

In a fast-growing era of new technologies, robotics and automation have the potential to rapidly evolve as they can positively transform lives. Hence, it has been growing at a fast pace.

Picking stocks with a Thematic Approach!

The thematic approach towards stock picking involves combining companies across sectors based on a common theme. For example, a fund launched with population as a theme will cover companies such as insurance and healthcare companies.

Thematic investing based on the theme “Population Growth”
A 3-year trend analysis of investing based on the theme “Population Growth” leads to identifying the stocks that will fit in the parameters of this theme. Parameters consist of age structure, mortality, etc.

As the population in the Country rises, the growth of companies like HDFC Life Insurance also increases on the grounds that such companies tend to benefit from this macro-level trend. Moreover, a rapidly aging population will have pension and healthcare needs which tend to benefit such companies.

Such analysis allows investors to “personalize” their portfolios by studying their ideas along with academic research. Hence, thematic investing exhibits that “big changes may lead to big opportunities” as it includes investing in a bigger basket of stocks which gives it the advantage of some diversification.

Picking stocks with ESG Thematic Approach

ESG thematic approach is identifying investment strategies that target specific Environmental, Social, or Governance factors evident in growing global trends. It determines which companies are best positioned to benefit from them and creates a portfolio that takes into account such insights.

A lower rating indicates a lower risk. Accordingly, Quantum India ESG Equity can manage its ESG risks better than SBI Magnum ESG Equity, due to lower risk rating in all the three sectors.
The sustainability of ESG funds is expressed using a 5 Global Ranking System, a lower rank indicates low sustainability, hence, higher the rank, the better. Quantum India ESG Equity holds the 5th Globe Ranking whereas SBI Magnum ESG Equity holds 3rd Globe Ranking, making Quantum India ESG Equity 90% more sustainable than its peers.

ESG Thematic Investing is gaining traction due to its ability to reduce the regulatory and reputational risk for companies. Companies, governments, and various industries are likely to face environmental, social, and economic challenges. One major reason could be the growing population which puts a huge strain on the planet’s resources, global temperature increase, and so on. All these factors can lead to an increase in world issues that are social like inequality and stratification, environmental like pollution, as well as health related like the COVID-19 pandemic.

Gaining traction in India!

  • Few major demand drivers of thematic funds in India are the rapidly growing population, the need for advancement, and the requirement of maintaining sustainability.
  • As per a report released by Yes Bank on ESG Investing, India’s ESG linked assets stood at $30 billion as of Dec 2019 and are expected to grow to $240 billion by 2030.
  • As per the report by AMFI (Association of Mutual Funds in India), thematic funds in India saw it’s largest inflow of $0.25 billion in February 2020 alone. However, it is yet to reach its peak.

Indian markets can prove to be an investment hotspot in the near future as it is an untapped opportunity for investors across the world.

The performance of thematic funds is dependent on the performance of a particular theme, unlike other funds that move in line with the markets. In India, thematic funds are still in the recognition phase and act as an alternative to traditional investing.

We are living in a world of extraordinary change. It is evident that due to the COVID-19 pandemic, few industries such as healthcare technology, clean energy, local manufacturers are witnessing stable growth but at the same time, some industries are struggling such as aviation, and automobile industry. This implies that investors need to shift their focus from investing in individual equity stocks for a short-term period to investing in global themes for a long-term period.

Contributor: Team Leveraged Growth
Co-Contributor: Gitanjali Raidurg & Madhuri Kothari

Research Desk | Leveraged Growth