Thematic Investing In a Nutshell

“Why is thematic investing a good idea? In a rapidly changing business environment, the winners will be those that anticipate trends and take advantage of new opportunities.”

– Towers Watson, “Thematic Investing”

What Is Thematic Investing?

In short, thematic investing follows macro-level trends to help investors identify areas of growth in disruptive and evolving industries. As the name suggests, this particular approach allows investors to align their social and economic viewpoints to the companies they are investing in. For example, if you are passionate about making the world a better place, you can choose to invest in companies that make positive impacts politically, environmentally, and socially. According to the 2017 Beyond Baby Boomers Survey: The Investable Assets of Tomorrow (source), nearly 83% of millennials considered integrating thematic investing into their portfolio strategy. And when asked why, 40% claimed because of the way themes reflect their personal values. This goes to show that modern day investors care more about the purpose behind their investments rather than the profit itself.

How Do We Choose the Right Theme?

Just because a company shares a similar viewpoint as you doesn’t necessarily mean it will give you the highest return. In fact, it may even do the opposite. And thematic investing is quite different from the traditional ETFs, which track benchmark indices such as the S&P 500 or the Dow. So how do we consider which theme portfolios to choose?

McKinsey & Company (source) recommends that to integrate a successful thematic investment strategy, one needs to take into account these four crucial factors:

  1. Attractiveness — Are there businesses currently exposed to this theme? In other words, how appealing is it? Before you decide whether this theme is short-lived or not, you should always consider if there is any substantial traction amongst other companies.
  2. Risk Level — Check if there are other forces that are working against this theme. As a serious investor, you should always avoid any binary outcomes. Can your investments run without any high-level risks?
  3. Differentiator — Before you decide to invest in a theme, you should consider gathering as much information as you can. For example, market access, an understanding of assets and their value chains, and existing relationships to the right partners should all be considered.
  4. Flexible — Make sure that your theme is easily integrated into your existing investment structure. Doing so will allow you to focus on issues that matter the most, rather than addressing minor and unrelated problems.

Are There Different Types of Themes?

Another way to consider a theme is to know if the trend is cyclical or structural.

  • Cyclical Themes — A mean-reverting trend that changes depending on the business cycle, eventually coming back to its average level of impact. Examples include asset valuations, volatility, interest rates, and currency values.
  • Structural Themes — A structural trend has a long-term effect on market valuations. It occurs on a few occasions and tends to shift existing paradigms. Disruptive technologies is one example of a structural theme. Investors should generally try to identify this theme rather than the previous, simply because of its potential for long-term growth.

What Are the Benefits & Downsides?

Like most investment approaches, thematic investing has its strengths and weaknesses. One key strength is that when compared to other fund strategies, a theme portfolio will include highly concentrated stocks — usually comprised of 10. While diversification is good, spreading out too much across different sectors is not always good for growth. That’s why for a theme portfolio, focusing on a small selection of stocks can provide a long-term growth potential.

Thematic investing is also customizable, which means you have the power to choose stocks based on your own preference. While mutual funds are mostly generic, theme portfolios are unique in nature. For instance, say you are investing in 3 different mutual funds. Chances are, your stocks will overlap, which means it will achieve the opposite of what you set out to do. However, if you invest in 3 theme portfolios, your investments will most likely not overlap since you are exposed to different sectors and themes.

On the other hand, one apparent downside to thematic investing is selecting a theme that seems to be short-lived. That’s why it’s crucial for investors to differentiate a theme that’s structural and a theme that seems to be just a fad. Imagine you invest in a theme and just after a month, it died?

Different Services for Thematic Investing

In the current markets, the top two fintech firms that focus heavily on theme investing are Motif Investing and Stash.

Motif Investing is part online brokerage and part robo-advisory, offering customers to trade stocks and exchange traded funds at low costs. This service provides investors with a selection of theme-based portfolios that include 30 stocks. Investors can customize the list based on their preference and pay a fee of $4.95 per trade. Motif also includes fractional shares, meaning customers can build a portfolio with only a small sum of money.

Stash is geared towards beginner investors. The mobile app provides a list of suggested ETFs for customers to choose based on their financial situation and goals. Stash allows investors to put in as little as $5 dollars to start. Stash also offers fractional shares. Stash’s approach is similar to Motif Investing, but rather than putting together 30 stocks, it simply renames existing ETFs. For example, “Do the Right Thing” is socially responsible U.S companies via the iShares MSCI USA ETF. Stash’s service costs $1 a month for balances under $5,000 and $2 a month for Individual Retirement Account (IRA) balances under $5,000. Then the fees switch to a percentage of assets.

KOSHO is a user-friendly mobile app that utilizes AI deep learning technology to forecast the financial markets and provide useful data analytics as well as relevant news information to help investors make better decisions. KOSHO integrates a gamification feature to help customers better engage with the financial markets and includes a monthly subscription fee to access highly targeted thematic portfolios.

KOSHO has three features:

  • Customers can buy and sell a stock for just under $10 dollars. This is similar to the fractional shares like Motif and Stash.
  • If our customers want to invest in overseas stocks, they don’t have to pay any transaction or exchange fees. The only fee they need to account for is the hedging forex fees, which reduces the entire cost to nearly 98%.
  • KOSHO’s core technology is based on AI deep learning. It uses the latest CNN & RNN deep learning algorithm to analyze the past 30 years of market history and takes into account nearly 400 million datasets, allowing us to better understand historical information and recognize similar market movements in the present time.
  • To learn more, click here.

KOSHO is available to download for free in the App Store & Google Play Store. Download here.

Key Takeaway

Whatever your goals are, whichever investment approach you take, the most important thing to remember is to know where your money is going. To do that, you have to do your own research. Thematic investing is a great way to not only align your values with the market, but it’s also a convenient approach to become proactive with your investments. There are several tools available in the market that are useful and easy to use. So why wait? If you haven’t started, try it out today!

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