A guide to portfolio themes and thematic investing

A guide to portfolio themes and thematic investing

A lot of firms provide services and goods that have an impact on our lives or have missions that align with our beliefs. We constantly hear statements like “electric vehicles are the way of the future” and “the renewable energy sector will grow dramatically.” When it comes to investing, however, there may be multiple companies that share our values, making picking a company to invest in within that area challenging. You might be interested in sustainable energy, but have no idea which company will outperform in that field. Thematic investing may be the answer if you’ve found yourself in this situation.

What does the term “thematic investing” mean?

Thematic investing is a way of spotting significant chances or betting on popular trends without having to do comprehensive research on individual stocks. For example, if you believe the popularity of electric automobiles will skyrocket in the coming years, you may invest in a theme created specifically for that purpose.

Despite having the necessary investing methodology, most investors do not have efficient equity portfolios due to a lack of experience and time. Thematic investing, which allows you to invest in a number of specialist areas that can provide concentrated exposure in line with your beliefs, may be a solution to this problem.

What is the Thematic Investing Process?

Despite the fact that thematic investing saves time and effort by eliminating the need to research and analyse specific organisations, it is still required to research and study the theme you are interested in, as well as comparing its risk and performance to the market. For your thematic investment approach, you can create a portfolio manually or choose from a variety of thematic investing ETFs.

The processes for manually developing a thematic portfolio are as follows:

1. Classifying and Identifying Themes and Categories:

You can choose to invest in themes that align with your ideals or in new trends. For example, you might want to invest in Fintech companies all over the world or Robotics/AI companies. A wide number of industries, including Emerging Markets, are included in thematic investments. You begin by eliminating the items that do not pique your attention.

2. Research and decision-making:

Compare and benchmark a variety of themes and industries, as well as other asset classes. When benchmarking, make sure to compare the theme’s risk (volatility) to the market. The portfolio can then be tailored to your specific requirements and risk profile.

3. Managing Weights:

Consider using a market-cap-weighted or risk-weighted distribution of stocks/ETFs in the theme. However, you can mix and tailor your portfolio based on your risk tolerance.

4. Rebalance:

In order to achieve optimal returns and risk balance, it is usual to rebalance your portfolio on a regular basis. As the components’ performance diverges, you should adjust your portfolio to bring the weights back in line with the initial approach. The goal is to ensure that the stock portfolio always represents the underlying theme.

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