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‘The composition of a good thematic fund…’: here’s what 10 selectors said

How much diversification is needed in a thematic fund? We asked 10 fund selectors.

Simon Godfrey, EFG Bank

Head of products, Hong Kong

In general, the broader the theme, the more that can be gained from exposure through active management, rather than a simple basket or exchange-traded fund. The disadvantage of narrow themes is that they can be dominated by a few stocks only and may not be sufficiently diversified, too volatile and hence unsuitable for private client portfolios.

Technology and healthcare are now broad themes that offer many different types of exposures. Some themes, especially newer ones may best be accessed through private capital and the risks and liquidity constraints which that entails, may also not be suitable to all clients.

In summary, a good thematic fund should have a number of sub-themes, sufficient depth to provide diversification and a management team that is deeply specialised and a significant track record through market cycles. In reality, such funds are hard to find and the leaders in each category are few in number.

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Simon Godfrey, EFG Bank

Head of products, Hong Kong

In general, the broader the theme, the more that can be gained from exposure through active management, rather than a simple basket or exchange-traded fund. The disadvantage of narrow themes is that they can be dominated by a few stocks only and may not be sufficiently diversified, too volatile and hence unsuitable for private client portfolios.

Technology and healthcare are now broad themes that offer many different types of exposures. Some themes, especially newer ones may best be accessed through private capital and the risks and liquidity constraints which that entails, may also not be suitable to all clients.

In summary, a good thematic fund should have a number of sub-themes, sufficient depth to provide diversification and a management team that is deeply specialised and a significant track record through market cycles. In reality, such funds are hard to find and the leaders in each category are few in number.

Colin Low, Wealth Management Alliance

Investment advisor

Thematic funds have been an important part of our clients’ portfolios. We use them to drive long-term outperformance riding on high-conviction megatrends.

The composition of these funds that we are willing to accept depends on the specific theme driving a fund. Geographically speaking, we would like to see funds that are able to pick future winners in markets outside of the US. Although we recognize that the US remains a primary driver of innovation, we also know that they by no means holds a monopoly on it.

In terms of holdings, we like funds that are more broadly diversified across the market capitalisation spectrum, and to have at least 50 to 80 holdings. With thematics, we’re already taking a very specific and concentrated risk, so we prefer that these funds are more broadly diversified but still driven by bottom-up fundamental research. In the same vein, we also like themes that are more diversified sectorally – such as the millennials theme.

Jansen Phee, UBS Wealth Management

Head of funds investment solutions, Asia Pacific

A good fund is a good fund, regardless it being a thematic focused fund or not. However, when it comes to thematic focused funds there are additional points that we need to consider: a credible definition of the investable theme universe, and thematic purity where companies’ activities are predominantly within the scope of a particular theme. 

The level of diversification depends on the themes, which can result in a narrow or broad opportunity set. We have observed some strategies with a very niche theme that results in a small investable universe of 30-40 stocks, which is not ideal for active management.  Very niche themes should be complemented with relevant themes to broaden the investment opportunity set.   

Haren Shah, Taurus Family Office

Managing director and head of investments

Thematic investing has been around for some time now. However, in the past few years, it has taken on a more significant attention by investors. This has been mainly due to fund houses launching more of such funds as they try to differentiate their offering and target specific areas of interest.

Investors usually like thematic funds to be focused on specific areas and do not want too much dispersion within those funds. However, especially in many of the themes, there tends to be overlap between them. Take climate change, this area would include many industries that are trying to develop new more ‘green’ ways of operation but also includes companies that may be developing new technologies that help in addressing climate change.

It is usually good to have a broad diversification within a thematic idea as this allows the manager more leeway to invest in a rapidly changing environment. We have seen that in these uncertain times, such focussed approach has an important place in portfolio construction.

Aman Dhingra, UBP

Head of advisory, Singapore

Thematic investment can be tricky as often the headline and the investable universe do not always tally. First thing we look at is the broad story behind the theme - is it a structural shift?

Second thing we look at is the theme investable and whether there are enough companies that can be a pure expression of the theme.

Themes are in themselves building blocks. An ideal portfolio should be managed with optimising portfolio return/risk characteristics by completing high beta and volatility themes, such as software as a service and biotech, with more stable themes like sustainable infrastructure to create more balanced portfolios. 

Munish Randev, Cervin Family Office

Founder and CEO 

Thematic allocations are always strife with risk; the risk of being able to call the theme well in advance and also to be able to shortlist high conviction ideas that will lead the charge in the up move.

For a thematic fund to be successful we need three main constituents: a clearly defined universe and underlying constituents, a concentrated high-conviction ideas portfolio with no allegiance to the usual tenets of a diversification, and the ability to return capital if the theme has lost steam or life in the thesis.

The third point is often debated but we believe that being cyclical in nature, these thematic fund managers need to be able to safeguard their track record and either have ability to stall new inflows or even return capital at an opportune time.

In current times technology thematics have seen continued interest but the next test for these funds will be around how they change their major holdings as new large disruptors prop up from different innovation ecosystems.

Rishabh Saksena, Julius Baer

Head of investment specialists, Asia Pacific

The investment strategy should largely reflect the theme itself. For example, within the technology space, for themes like fintech and cybersecurity, strategies that are pure to the investment thesis would be ideal.

Of course, if there are constraints in terms of the investment universe and there may be a need to broaden the theme to include closely related areas.

Stanley Chan, Indosuez Wealth Management

Senior director, public markets solutions, asset management, markets, investments and structuring 

The fund needs to be true-to-the-label, ‘investible’ and broad enough for the portfolio manager to not only generate consistent alpha, but also switch stock ideas.

We have seen robotic funds which are not different from a large cap technology funds. On the other hand, niche themes help for marketing as we all love stories. However, we need to ensure that the fund and more importantly, the investment results can be sustained.

Patrick Ho, HSBC Private Banking

Chief market strategist, North Asia

We think investors should take a portfolio approach for thematic investing considering the need for diversification among countries, sectors, issuers and asset classes.

Some investment themes can be very specific, like 5G technology, and others are about multi-year and multi-discipline trends, such as sustainable investing. Some funds with sound investment objectives and transparent investment criteria can be used for investors to gain exposure to certain underlying thematic ideas.

But in some cases, investors may prefer to hold several funds to get a comprehensive exposure to a more multi-discipline investment theme.

Youssry Henien, Windsor Family Office

Chairman

Thematic investing can be an interesting vehicle for investors who wish to seek exposure in long-term trends. Thanks to the pandemic, many themes have proven to excel and may very well continue to gain traction. Due to the present environment and of course the global political climate, there could be opportunity around the corner. Once a theme has proven to outperform, then it is common for investors to gravitate towards the trend. I could expect more flows into exchange-traded fund (ETF) centred themes and possibly new product launches, however at most likely expensive valuations. 

A composition of a good thematic fund is identifying categories that could have a promising long-term outlook with the expectation that possible companies today may be replaced years from now. Whether those categories fall under ‘disruption’ or ‘major trends,’ investing in these potential shifts, could benefit from emerging opportunities, especially when the market tends to underestimate that change.

We already saw it earlier this year. Covid came, destroyed and conquered, forcing global markets to shift to a totally different direction with different objectives. Moving forward, I believe research is key and so is diversification. Placing too much investment into a single stock brings concentration risk. Buying multiple ETFs and mutual funds based on thematic strategies can spread the stock-specific risk whilst maintaining focus.

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