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The thematic fund sector, wounded by bad news from disappointments such as the meteoric rise and fall of Cathie Wood’s technology-focused exchange traded funds, is finding pockets of support, market observers say.
Overall, the funds, which encourage investors to focus on narrow long-term trends such as ageing populations or clean energy, have been battered over the past few years.
After net inflows peaked at $109bn in the first quarter of 2021, global thematic fund flows (excluding China, which is slow to report) have been in steady decline, with net outflows since the second quarter of 2022, according to data from Morningstar.
The past four quarters have been particularly punishing with outflows of $14bn in the last quarter of 2023, rising to $16bn in Q1 2024 and settling at $13bn in each of the three-month periods ending June 2024 and September 2024.
Global thematic fund assets, which surged to $892bn in the bull market after the peak of the Covid-19 pandemic, have since tumbled more than a third in the wake of what Morningstar calls the “tech reckoning”. Global assets invested in thematic funds including China totalled just $562bn at the end of June 2024.
Thematic fund providers have responded accordingly with fund closures by mid-2024 outnumbering launches this year, the first time this has happened since 2013, according to the latest Morningstar analysis.
But despite the punishing backdrop, there are indications that despite the lack of loyalty many investors express towards thematic ETFs, they are happy to continue to use them in specific ways.
“My argument has always been that we should be comparing them to single stock bets,” said Kenneth Lamont, senior research analyst at Morningstar.
He pointed to the swings of fortunes experienced by different themes over the past few years with the fashion for alternative energy giving way, after the theme “nosedived” in 2022, to others such as one recent hit with thematic investors: artificial intelligence.
But as if to emphasise how ephemeral themes can be, Morningstar data suggests AI might itself be about to face a reckoning after AI funds in the US and Europe slipped into net outflows in the third quarter.
However, their niche appeal remains undimmed — recent interest in infrastructure funds in the US, for example, could be seen as a purely political play, Lamont said.
“Thematic funds are designed to be volatile,” he said, adding: “They are a tactical product. They are risky and if you don’t understand that, you shouldn’t be investing in them.”
However, the Morningstar research also points to a more conservative fan base for the thematic approach. Broad thematic funds, which invest across many different themes, currently represent the most popular concept by assets globally, according to the report.
Pictet, the Swiss asset manager whose $12bn Pictet Global Megatrend Selection (GMS) is the largest thematic fund globally, according to Morningstar, says that in 30 years it has closed down only one thematic strategy of the 17 it manages. The fund invests in 12 so-called megatrend themes including water, robotics, security, health and clean energy.
“We invest with a very long-term view,” said Marc-Olivier Buffle, senior client portfolio manager of thematic equities at Pictet Asset Management. “Not all thematic approaches are created equal.”
“While assets in our overall franchise have doubled over the last five years, they have tripled in the strategies sought out by institutional investors [including GMS],” Buffle added.
“What is absolutely clear is that you want to have choice, so you can move through the cycle, so you’re not stuck in a small part of the market,” he said.
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