Thematic funds, which focus on long-term trends like clean energy or aging populations, have experienced a rough patch in recent years. Once praised for offering investors the chance to capitalize on specific sectors, these funds have faced declining inflows and a steep drop in assets. However, market observers note that despite the setbacks, thematic funds are finding new pockets of support, especially with more tactical and multi-theme strategies.
Declining Inflows and Weakened Performance
Thematic funds saw their peak in early 2021, with net inflows reaching $109 billion in the first quarter. But since then, the sector has struggled. Global thematic fund flows (excluding data from China) have been in steady decline, with net outflows beginning in the second quarter of 2022. According to Morningstar data, the last quarter of 2023 saw outflows of $14 billion, which worsened to $16 billion in the first quarter of 2024. Outflows continued at $13 billion per quarter through the middle of 2024.
Thematic fund assets surged during the bull market after the COVID-19 pandemic but have since fallen by more than a third. As of June 2024, global assets in thematic funds—including China—totaled just $562 billion, down from $892 billion in the market’s peak.
Market Adjustment and Fund Closures
In response to the shifting market, thematic fund providers have made adjustments. According to Morningstar, more funds closed by mid-2024 than were launched, marking the first time this has happened since 2013. This trend reflects the broader struggles of thematic funds, as investors have been wary of betting on niche sectors with volatile performance.
Tactical Strategies and Specific Themes Draw Attention
Despite the overall downturn, thematic funds continue to attract interest, especially when used for tactical or short-term investment plays. Kenneth Lamont, senior research analyst at Morningstar, suggests that thematic funds should be viewed similarly to single stock bets due to their inherent volatility. He pointed to the changing fortunes of different sectors—such as the rise and fall of alternative energy, which was replaced by more recent interest in artificial intelligence (AI).
However, Lamont also highlighted that even AI funds have faced challenges, with net outflows reported in the third quarter of 2024 in both the U.S. and Europe. This underscores the unpredictable nature of thematic investing.
The Appeal of Multi-Theme and Broad-Based Funds
While niche thematic funds may be struggling, more broad-based or multi-theme funds are gaining popularity. According to Morningstar, broad thematic funds, which invest across a variety of sectors, represent the largest share of thematic assets globally. These funds provide investors with exposure to multiple trends and reduce the risk associated with betting on a single theme.
Pictet Asset Management, a major player in the thematic fund space, has seen significant success with its $12 billion Pictet Global Megatrend Selection (GMS) fund, the largest thematic fund globally. The fund invests in 12 megatrend themes, including water, robotics, security, health, and clean energy. Marc-Olivier Buffle, senior client portfolio manager at Pictet, emphasized the long-term view that drives the firm’s investment strategy.
Long-Term Investment View Gains Traction
Buffle explained that Pictet has closed just one thematic strategy in its 30-year history and pointed out that its megatrend strategies, particularly GMS, have gained traction with institutional investors. He noted that while assets in Pictet’s broader portfolio have doubled over the past five years, the assets in these long-term thematic strategies have tripled during the same period.
“What is absolutely clear,” Buffle said, “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.” This approach reflects the broader trend of investors seeking diversified exposure across various themes rather than betting on a single, volatile sector.
Conclusion
While thematic funds have faced headwinds in recent years, their appeal remains strong, especially for those looking for tactical, multi-theme strategies. With a long-term view, investors continue to find value in thematic investing, particularly in broader funds that offer exposure to a variety of trends. The sector may be adjusting to recent challenges, but the potential for growth and diversification remains a key driver for institutional and individual investors alike.
Related topics:
