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Thematic investing

Demystifying thematic equities

Demystifying thematic equities

February 2018

Actively-managed by specialists who conduct rigorous company research, thematic equity funds are designed to help investors get the most from their stock investments.

Getting the most out of your stock investments

Whatever your investment goals, stocks are bound to be a key feature of your portfolio. That's because, over the long run, equities generate higher returns than most other investments, albeit with greater risk (Fig. 1).
Fig. 1 Equities: superior returns over the long run

Yearly return, %, 1997-2017

asset class return
*Source: JPMorgan, Barclays, FactSet, Standard & Poor’s, Dalbar Inc. Indexes used: S&P 500, Oil: WTI Index, Bonds: Barclays U.S. Aggregate Index, Gold: USD/troyoz, Inflation: CPI. Returns are annualized (and total return where applicable) and represent the 20-year period 30.09.1997-30.09.2017
The thing is, not all stocks are the same. Some companies are far more profitable – and much better run – than others (Fig. 2). And there are also many industries whose best days are behind them.
Fig. 2 Some stocks don't pay off

Return, indexed, Sears vs US retail sector stocks

sears thematics
Source: Bloomberg; data covering period 31.12.2012-31.01.2018

Active thematic equity: beyond mainstream

So, for investors that wish to put some or most of their capital into stocks, it’s important to ensure that this investment is put to the best possible use.

At Pictet Asset Management, we believe one way investors can make the most of their allocation to stocks is by investing in thematic equity funds.

Thematic investing is not new – we’ve been doing it for more than 20 years (Fig. 3). But it’s very different from what most investment firms do, and in several important ways.

fig. 3 Thematic equities at Pictet Asset Management: More than 20 years of experience
thematic strategy launch dates
Source: Pictet Asset Management

Dynamic industries, specialised companies, specialist investors

To begin with, our thematic equity funds don’t invest in every segment of the economy. Instead, they focus on the world’s fastest-growing sectors, dynamic industries such as robotics, clean energy and digital technology (Figs. 4, 5, 6).
Fig. 4/5/6 dynamic, rapidly-growing industries

Fertile ground for thematic investments

focus on fast growing sectors
Source: *International Energy Agency, **Boston Consulting Group, Pictet Asset Management
***Internet World Stats.

That’s where we believe the most attractive investment opportunities are. And unlike many other equity funds, our thematic stock portfolios invest mainly in smaller, specialised companies - firms with specific expertise and a clear competitive edge.

That’s a deliberate choice. History shows specialist firms tend to fare better over the long term than the large, diversified firms you’ll find in a mainstream stock index such as the S&P 500 or the FTSE 100, which are prone to a ‘conglomerate discount’ – a valuation penalty that’s applied to big, complicated businesses.

The differences don’t end there. What also sets our thematic equity funds apart is how they are run. Most equity portfolios available to investors are managed in one of two ways. Many are overseen by a generalist investment manager, a jack of all trades who picks stocks from a very long list of analyst recommendations.

Others follow strict rules-based models that leave little or no room for human judgement or skill. Passive, or exchange-traded funds, which invest in companies without due regard for their future profitability, governance standards or stock price, fall into this category.

Our thematic equity portfolio managers do things rather differently. They’re neither generalists nor rule-takers but seasoned specialists who’ve got to know their industries over many years and market cycles.

Experts in their chosen fields, our investment professionals don’t rely on analyst recommendations; they carry out their own detailed research – company by company – to find the most promising investment opportunities. They’re active managers in every sense.

And through our Advisory Boards, each portfolio manager has access to world-renowned industry practitioners and academics, experts with years of experience that can offer a fresh perspective on new investment opportunities (Fig. 7). 

fig. 7 indispensable insight - what our thematic advisory boards provide
advisory board

Source: Pictet Asset Management

Thematic funds: built on fundamental research, designed to deliver better returns

So with specialist investment managers investing in specialised companies in dynamic industries, we believe we can build a portfolio that draws on the very best of human ingenuity. It’s what sets our actively-managed thematic equity funds apart. It’s also what can help investors get the most from their equity investments.
thematic circles
Source: Pictet Asset Management