InvTech company of Datrix group
  • 6 June 2022

Thematic Investing: what it is and how it works

thematic investing - stock picking

Thematic Investing: what it is and how it works

Thematic Investing: what it is and how it works 1024 683 FinScience

What is Thematic Investing

Thematic Investing is a top-down investment approach to diversify a portfolio, identifying macro themes that are more likely to achieve a long-term value increase.

It is based on macroeconomic, geopolitical and technological trends. These are not short-term swings, but real structural and transformative changes.

For example, if you believe that an ESG-driven vision will experience relevant growth in the coming years, you should invest accordingly, in a business aligned with this theme.

However, when choosing which companies to invest in, many of them may correspond to a highlighted trend, the hard part is deciding which stock will perform best, predicting where the most significant investment opportunities lie.

Despite the best of intentions, when they lack experience or time,  most investors still do not have efficient equity portfolios. 

In this sense, Thematic Investing is a very functional approach, because it allows you to invest in different sectors, even very specialized ones, while remaining consistent with your values.

Thematic Investing: how it works

When it comes to thematic investing, the first thing to do is to identify the most interesting themes. You can base your choice on ethics,  preferring themes compliant with your convictions; or on data, filtering the innovative trends that are growing and gaining popularity: often a combination of the two criteria brings out the best results.

For example, you may want to invest in a particular Industry – such as FoodTech – or in a particular part of the world – such as the United States, or emerging markets in general.

Once the different themes and sectors have been filtered, we move on to the benchmarking phase, where they can also be compared with respect to other asset classes.

To get a complete picture based on risk, you also need to compare the volatility of a specific theme within its market. 

At this point you can proceed with the portfolio’s configuration, according to your preferences and a more prudent or aggressive profile, opting respectively for a weighted or more personalized distribution.

The third step is to periodically rebalance your portfolio to balance risk and generate optimal returns, based on the performance of the various components, aligning the weights to the initial strategy: the idea behind it is to ensure that the equity portfolio always follows the chosen theme or themes.

Hot trends: why you should invest there

Thematic Investing is certainly receiving growing attention, since there is a growing need to identify future factors of return on equity investments with a good safety margin.

Anticipating a potential for structural change in the market and investing in time is an essential factor for successful investment: just think of those who decided to believe in the rise of the internet in the early 90s.

This is important especially for long-term investors, in order to prepare the ground for significant growth opportunities in their portfolio.

In a world where many investment decisions are based on past experience and historical data, Thematic Investing is a forward-looking alternative.

In fact, the difference is as simple as that. Knowing today what is bound to grow tomorrow, rather than continuing to focus on what has already flourished yesterday.

AI applied to Thematic Investing: a value added

Thanks to its alternative data-driven vision and a proprietary analysis methodology based on Artificial Intelligence, FinScience identifies the hottest topics – based on long-term trends – but above all the best titles associated with each individual theme.

On a daily basis, the data collected on social networks, blogs, forums and news are evaluated through specific metrics, to get the most out of your portfolio, through:

  • Optimization, to analyze the current situation and understand how the equity portfolio is clustered according to themes;
  • Trend analysis, to identify the hottest topics on which it is worth investing;
  • Stock picking, to select the best listed companies under a specific theme.

In short: strike the iron when it will be hot. This way you will forge the perfect key to your investments.