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January 26, 2021

The 101 of Investing in Thematic Funds 

blog header image_satellite investment_the 101 of investing in thematic funds

Are you the sort of person who dreams about the next big thing or is astonished at how technology is changing and improving our lives? Yes? Us too.

Welcome to Thematic Funds

What does the futurist in you think the world will look like in 20 years’ time? Will we have consumer space travel? Have cured and eradicated some major diseases? Will we live more densely in cities or the opposite?

After all, twenty years ago, most of us had landlines, no one had logged into Facebook or Twitter, and AIDS deaths were rising towards 2 million a year. What is the next big thing the world will have to enjoy: innovation like airplanes, smartphones, or penicillin that changes humanity?

Things change, often quite rapidly

In 2000, three of the top five companies in the world by revenue were car manufacturers. In 2020, three of the top five by revenue were petroleum companies. But who thinks that will continue and not be surpassed by Big Tech, who are currently four of the top five by company valuation?

So what are the Thematics?

Thematic investing is choosing investments based on a particular theme; usually related to a macroeconomic trend. A view on what the future will look like and how quickly that future will arrive.

By contrast to core investing (e.g. investing broadly across markets through the Global 100), thematics and factors are satellite investments. Something to tilt your portfolio towards a belief, interest or trend.

Common themes relate to socioeconomic changes such as ageing populations and life expectancy, geopolitical trends such as urbanisation and clean technology, or the adoption of new technologies such as electric vehicles.

The general expectation is that companies entering rapid, widescale adoption will realise their growth potential and therefore increase in value faster than the rest of the market. Just like Big Tech has over the last 10 years.

Based on this expectation, a company like Tesla has had a phenomenal 2020. But equally, WeWork and Intelsat are two hyped companies that had dismal years, losing their investors plenty. This is because, like any speculative investment, it is the anticipation and likelihood of success that drives the share price and valuation.

Why choose a thematic fund

Many investors like the idea of picking a favourite company, where they buy into the story and their research and anticipation of the companies’ potential. But this also comes with its challenges.

VHS recorders and Compact Discs were ground-breaking, widely adopted technologies that ended up being short-lived. Nokia and Blackberry were pioneers and leaders only to quickly be superceded.

A thematic fund gives you an alternative to this gamble of picking which individual company will succeed as the next big thing. Better yet, it gives you the chance to benefit from many companies future success.

Thematic funds can provide outstanding returns for the investor well above that of a general market or sector. IF, and it’s a big if, the theme chosen realises its potential.

As an investor, you will need to choose the theme or themes that you think have the best chance of performing well. The next step is to choose an index fund such as Kernel’s or to choose an active fund.

For an index thematic fund there are objective criteria, which are transparent and published. An active thematic fund, meanwhile, invests on the discretion of an individual or committee, having to choose what and when to buy and equally what and when to sell. For more on this, see how an index fund works.

Know your risks

There are higher risks associated with investing in a thematic fund. Less risky than choosing an individual company, but more than a well-diversified multi-sector fund. Here’s a couple you should be aware of.

Higher Volatility

When a portfolio is built with a theme in mind, the scope of investment opportunities is restricted. Therefore, it is only semi diversified as the companies within the fund are likely to be highly correlated. Due to this correlation, the fund is likely to be more volatile.

Adoption might take longer

Sometimes, for a theme to reach its expected potential it takes time, and investors are often over-optimistic about how quickly that will happen. For instance, e-commerce since the 1990’s has had immense potential. But only now and with the disruption caused by COVID-19 can we see adoption reaching far and wide. People are creatures of habit and routine after all.

It takes time and patience for themes to materialize businesses into great companies. If you are an investor who is looking for good returns in the long term, thematic funds can be a good option for you. However, it’s recommended that first-time investors shouldn’t directly jump in to thematic funds at the start of their investment journey. This is mainly because of the noise and potential for disappointment and disillusionment compared to something more diversified.

Thematic funds are not your core

In traditional investment strategy, which almost all financial advisers would recommend, a thematic fund is not a core part of a portfolio. It is simply too risky, in which to concentrate a significant portion of your wealth. However, a thematic fund is a “satellite” to which perhaps up to 10% of your wealth per theme could be invested.

If you’re looking for a thematic fund, look no further. We have just announced two new Kernel thematic funds: the Kernel S&P Kensho Electric Vehicle Innovation Fund, and the Kernel S&P Kensho Moonshots Innovation Fund.

Stephen Upton

Stephen Upton

Chief Operating Officer



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Indices provided by: S&P Dow Jones Indices