The 21st-century financial marketplace offers a bewildering array of equity portfolios for a spectrum of risk appetites and return objectives. Within this landscape, thematic portfolios address three basic investor needs.
First, thematic trends present exciting growth opportunities. In a world of acute macroeconomic challenges, long-term structural changes—from technological disruption to the energy transition—are powerful drivers of growth that are likely to persist over time, through the ups and downs of macroeconomic cycles.
Second, many equity investors crave idiosyncratic sources of returns. In other words, they want to tap into return streams that are likely to be meaningfully different from those of the broad market. Over time, differentiated return patterns can help a broader allocation deliver more balanced results by providing performance patterns that can withstand periods of market weakness.
Third, many investors want to express personal convictions in their investments. For some, it may be a commitment to combating climate change, while others might believe that safeguarding national security is a top priority. Perhaps an investor believes artificial intelligence (AI) is a force for positive change or wants to tap into demographic trends that are transforming societies. Thematic portfolios can reflect an investor’s market convictions, personal beliefs or views of the world through the stocks they own. These portfolios also let investors tilt their allocations toward pockets of the market in which they have higher confidence over the long run.
Food-related sub-themes include agricultural productivity, food technology and waste management, since there are enough companies related to each issue to form an investable, thematic opportunity set.
Clearly defined sub-themes provide tangible manifestations of the larger trend. Sub-themes help investors define the types of stocks that form a universe from which portfolio candidates can be selected. Robust thematic portfolios should be able to clearly articulate processes for identifying themes, capturing thematic “purity” in the allocation and finding those companies that are likely to benefit from the theme over time. By doing so, thematic portfolios will increase the chances of translating transformational trends into the powerful long-term return streams that investors crave.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.
Portfolios that sit at the intersection of these three needs can offer compelling approaches to investing in solutions to some of the most pressing socioeconomic challenges of our time. As a result, global thematic equity assets have become increasingly popular over the last decade. Even after falling from a peak during the coronavirus pandemic, by June 2024, thematic portfolios had assets under management of US$833.9 billion—over six times greater than in 2014, according to our analysis of Broadridge fund data.
Defining Thematic Portfolios
Traditional equity portfolios are usually defined by their basic characteristics. Some are based on an investing style—such as value or growth equities. Portfolios can be diversified across a large number of stocks or concentrated in a smaller group of holdings. They may focus on different parts of the market-capitalization spectrum, from larger to smaller stocks.
Thematic portfolios differ because they’re built upon a foundation of ideas. Automation and robots are spreading at a rapid pace. The green-energy transition is accelerating. Medical devices and innovative technology are transforming the healthcare sector. Big ideas like these anchor a thematic portfolio in the transformative trends that are reshaping the world.
But not every trend is a viable theme for investors. To qualify as an investable theme, we think a trend must be lasting, meaning it is likely to unfold over a longer period than a typical economic cycle and to spur massive investments through financial markets. Identifying themes requires fundamental analysis of market trends, demographics, regulation, politics, technological transformation and changing consumer behavior. Large thematic shifts will typically attract sizable capital flows from public and/or private sources. Examples include urbanization; the percentage of people living in cities is predicted to rise from 54% in 2020 to 70% in 2050. Infrastructure transformation is another powerful trend, with global spending expected to surge from US$2.8 trillion in 2022 to US$4.6 trillion by 2040 (Display).
Of course, non-thematic investors might focus on some of these themes when researching stocks, as they provide important fuel for growth. The difference is that a thematic portfolio builds its investing process around a defined theme or themes as its primary driver of future growth, and aims to gain diversified access to the theme by selecting companies that benefit in different ways.
But themes must also be investable. That requires a sufficient universe of publicly traded companies that are clear beneficiaries of the trend. By these criteria, we don’t think the global coronavirus pandemic, for example, qualified as a theme because it didn’t last long enough, and there weren’t many companies with business models explicitly aimed at addressing issues driven by COVID-19.
However, the changing nature of the workplace, which was accelerated by the pandemic, could be an investable theme; it’s a transformational change that will unfold over years, and many companies are profiting from business models that address the related challenges.
Identifying sub-themes can help define an investable universe (Display). Consider food transformation, in which the world is expected to experience a 70% global increase in food demand through 2050, according to the World Health Organization (WHO).
© AllianceBernstein L.P.
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