Opportunities and challenges of thematic investing: how to diversify your exposure ES

Opportunities and challenges of thematic investing: how to diversify your exposure

11 Dec 2024

Pierre Debru

Head of Research, WisdomTree Europe.

Key Takeaways

92% of professional investors surveyed have existing investment in thematic strategies
Investors continue to face investment barriers in thematics, such as too many strategies, too high overlap with market indices, and difficulty in choosing themes.
In response to those difficulties, more and more investors are turning towards thematic investment experts and multi-thematic strategies.

Thematic investing has gained significant traction amongst investors. In our annual professional investor survey, an impressive 92% of investors indicated that they allocate capital to thematic strategies². Total assets under management (AUM) globally in the thematic space now stands at $554.2 billion as of end of November 2024³.

Thematic strategies: an established investment

The appeal of thematic investing is undeniable. Technology advancements, demographic shifts, or sustainability initiatives can drive growth over long periods of time and create the giants of tomorrow. This allows investors to align their portfolios with long-term trends, invest early in future winners, and potentially yield substantial returns.

Over the last few years, more and more investors have turned to thematic strategies, with exchange-traded fund (ETF) strategies proving a popular investment vehicle for thematic exposures: nearly a quarter (24.7%) of investors exclusively use ETFs and just over a quarter (25.2%) use both ETFs and active funds⁴.

The paradox of choice

Despite the enthusiasm for thematic strategies, several barriers hinder effective allocation. One of the most significant challenges is the number of themes themselves (and then the number of available strategies for each theme). Over 21% of survey respondents cited ‘too many strategies to choose from’ as a key barrier⁵. It appears the overwhelming variety can lead to analysis paralysis.

Theme selection and allocation can be further complicated by timing. Identifying the right theme to invest in and the right moment to overweight or underweight that theme can be challenging. This difficulty is echoed in the survey results, where nearly 19% of professional investors expressed concerns about existing products following fads rather than sustainable trends⁶.

Thematic strategies with a high market overlap can also cause problems within a portfolio. A lack of differentiation can dilute the intended benefits of thematic investing and its diversification potential. High overlap between themes can also be an issue when constructing a multi-thematic portfolio: 20.44% of investors noted that they often encounter too much overlap with existing portfolio allocations when considering new thematic investments⁷. This overlap can lead to unintended risk concentrations and hinder overall portfolio diversification.

The case for multi-thematic strategies

Given these challenges, delegating thematic investment decisions to a specialised manager may be a prudent approach. Multi-thematic strategies allow investors to tap into various themes without the burden of selecting individual themes or timing their investments perfectly. Multi-thematic strategies can provide a one-stop shop solution to investors and offer a more diversified exposure, while mitigating some risks associated with single-theme investments.
Single-theme strategies saw a period of dominance between 2019-2021, which led to the proportion of thematic assets invested in multi-thematic strategies dropping to 10% at the end of 2021. Since then, multi-thematic strategies have had a resurgence, and now account for 17.5% of all thematic assets⁸.

Conclusion

Thematic investing presents an exciting opportunity for professional investors seeking to capitalise on long-term trends. However, the complexities surrounding theme selection, timing, and portfolio overlap make it a challenging endeavour. As such, delegating these responsibilities to a multi-thematic strategy may prove more effective in navigating the intricacies of thematic investing while maximising potential returns.

Source

1 WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.

2 WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.

3 WisdomTree, Morningstar, Bloomberg. All data as of 30/11/2024 and based on WisdomTree's internal classification of thematic funds. Performance is based on monthly returns from Bloomberg and Morningstar. Historical performance is not an indication of future performance, and any investments may go down in value.

4 WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.

5 WisdomTree Pan European Professional Investor Survey, June-July 2024, 800 respondents, conducted by Censuswide.

6 Ibid.

7 Ibid.

8 WisdomTree, Morningstar, Bloomberg. All data as of 30/11/2024 and based on WisdomTree's internal classification of thematic funds. Performance is based on monthly returns from Bloomberg and Morningstar. Historical performance is not an indication of future performance, and any investments may go down in value.