Thematic Investing

I hope you got away from the heat during the Summer and that you have returned refreshed and ready for work. This week I am looking at thematic investment. What it is and examples of popular themes being followed at the moment.

Thematic investment is an extra filter on the usual investment selection process. For example, after having established a range of potential investments, an investor may wish to select only those which conform to a chosen theme. Examples are socially responsible investment (SRI), ethical investing or Shariah compliant investment criteria.

Does this increase risk? Risk, in terms of the degree of volatility (the amount and speed with which something moves up or down) is usually greater the more filters/limitations are added. This is because the range of investment options are limited and the benefits of diversification reduced. However risks, such as not achieving your goal of meeting other criteria e.g. investing in a socially responsible way, are reduced as you have placed filters in your criteria to achieve these objectives.

Themes often look for strategies to benefit from shifts in consumer needs. For example, with an ageing population, it is anticipated that healthcare providers will be one of the major beneficiaries in terms of increased sales and demand for treatments of illnesses and conditions associated with old age.

State welfare programmes in the West are being stretched to breaking point partly due to increased life expectancy, therefore another sector that is expected to benefit is financial services where young people see the need to save for retirement and to have insurances to meet the needs formerly met by welfare programmes.

More esoteric themes surround the shortage of natural resources such as food and water. These ideas tend to focus on the problems a growing global population may have in supporting the demand for life’s essentials.

I’m sure you will be able to think of several more examples. The next question is how to access these themes in a cost effective manner without exposing your hard earned cash to excessive risk, such as investing it all in one company’s share. This will be the topic of my blog next week.

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