He says: “It is key that potential investors in funds enact thorough due diligence to gain an understanding of the potential implications of each thematic fund’s construction and methodology.
"Despite being relatively concentrated, thematic funds can often be useful diversifiers in a portfolio context due to their focus on areas of the market that tend to be relatively poorly represented in broad market indices.”
Fees
According to Morningstar, many thematic funds have chalked up impressive returns since the start of the global pandemic. But thematic funds' long-term track record is not nearly as compelling.
Morningstar said these funds' high fees contributed to their relatively poor performance versus broad market indexes.
Aniket Ullal, head of ETF data & analytics at CFRA Research, says the cost of fees is driven by various factors, including more specialised products existing in the thematics fund universe and lack of competition.
He explained that the average asset weighted fee for thematic equity ETFs listed in the US is 0.38 per cent compared to 0.1 per cent for broad market equity ETFs.
Ullal adds: “Fees in thematic ETFs tend to be higher than in broad market equity ETFs.
“This is driven by two factors: [first], thematic ETFs are more specialised products with more unique IP in the underlying index or active strategy.
“Second, there is less fee competition, particularly since Vanguard does not have as big a presence in that segment compared to traditional broad market exposure. However, even for thematic ETFs, fees are not excessively high – less than 0.5 per cent for most of the large thematic ETFs.”
This is why Lamont notes it is vital for investors pick the right fund rather than one that is the cheapest.
He says: “Both active and passive European thematic equity funds charge higher management fees than their non-thematic counterparts, on average. Fees are relatively high because asset managers can get away with charging them.
"Of course, subject matter expertise may be required to define and track a theme, but doesn’t fully explain the fee premium these funds command.
“Some investors appear happy to pay for a fund with a strong narrative, while the performance difference between two funds tracking a similar theme can be large and therefore picking the right fund can be seen as being more important than the cheapest.”
