Thematic Investing: More Than Just a Good Story

Strategies and Best Practices for Equity Portfolios

26 September 2024

3 min read

What You Need to Know

Big global trends such as technological disruption, urbanization and the energy transition offer exciting thematic stories for equity investors. But for thematic investing to work, investors need clear criteria to define lasting themes and a coherent process for building portfolios with real return potential and thematic purity. Above all, thematic portfolios must be constructed with the same rigor, discipline and risk-management controls as any active equity portfolio.

US$834 Billion

Assets under management in thematic equities, globally, as of June 30, 2024*

Estimated outperformance of US sectors related to the
cloud/e-commerce theme vs. S&P 500, 2009–2021

US$4.6 Trillion

Projected annual global infrastructure spending in 2040

Authors

In an increasingly complex global marketplace where short-term thinking has become the norm, considering the transformative forces that are reshaping the world can offer investors a compelling approach to strong long-term return potential. Thematic investing provides a differentiated way to generate wealth in contemporary markets by strategically envisioning the future through an investment portfolio while tapping into the powerful, universal appeal of a good story.

From technological disruption to the energy transition, people naturally connect to stories about change that can foster investment returns. Yet the simplicity of a compelling story may be misleading. Translating a trend into investment success requires identifying shifts that will persist, developing a thematic opportunity set and carefully selecting securities that are likely to create sustainably higher profits over the long term. Investors must also pay close attention to the special nuances of thematic portfolio construction while thoughtfully evaluating how the strategy fits within a broader allocation.

The quest for new sources of return potential has made thematic portfolios popular in recent years. Attractive themes for equity investors span technological and social issues as well as challenges in the physical world, such as infrastructure development, climate change, and transformations in agriculture related to food scarcity and production.

Well-defined thematic trends should be related to long-term policy, physical or social shifts that aren’t always easy to spot as they begin to unfold. Generally, these types of themes have tended to prompt long-lasting capital investment cycles (Display) as companies see opportunities for growth. Our research of select major shifts over the past three decades shows that as each theme has progressed, the associated sectors have outperformed the broad benchmark by a wide margin. For example, during the fossil fuel supercycle that ran from 1999 to 2014, the energy sector outperformed the S&P 500 by 7% per year. More recently, technology stock returns outpaced the US market by a similar annualized margin during the cloud and e-commerce cycle that began in 2009.

Thematic Trends Tend to Spur Prolonged Equity Outperformance

Left chart shows capital expenditures of four major structural themes in the past 30 years. Right chart shows the annualized returns of associated sectors during each theme versus the S&P 500.

Current analysis and forecasts do not guarantee future results.
*Some cycles shown extend past the end-year of the cycle to illustrate that investment wanes after the cycle peak.
†Sector outperformance is based on the performance of the relevant GICS sector from the start of the first year through the middle of the last year versus the S&P 500. The fossil fuel supercycle is energy from January 1, 1999, to June 30, 2014; the China-driven commodity supercycle is materials from January1, 2000, to June 30, 2012; communications infrastructure is 50/50 weighted communications and technology from January 1, 1992, to June 30, 2000; and cloud/e-commerce is technology from January 1, 2009, to June 30, 2021.
As of March 31, 2024
Source: Bloomberg, IHS Global Insight and AllianceBernstein (AB)

But identifying themes is just a starting point. It’s easy to look back and identify periods of powerful investment cycles, but much harder to predict when a theme will take off—and when it will run its course. Critics argue that the appeal of a good story doesn’t always lead to good investments. They’re not entirely wrong. For thematic investing to work, we believe investors need clear criteria for defining lasting themes and a coherent process for building portfolios with real return potential. Above all, thematic portfolios must be constructed with the same rigor, discipline and risk-management controls as any active equity portfolio.

*Based on Broadridge data

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.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

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