Saying that, Chloe Shea, investment director for multi-asset at Schroders, notes that political tensions do not always spell doom and gloom within the thematic fund universe.
In particular, she pointed to how growing tensions between China and Taiwan have impacted the supply of semiconductor chips. “Just like traditional sector funds, thematic funds are not immune to political headlines, which can act as both positive and negative catalysts for investments depending on the period and investment horizon one is looking at.
“However, investors should separate headline noises from actual regulatory regime shift. Taking semiconductor as an example, the recent China and Taiwan tension has spiked investors’ concerns on the prospect of many Taiwanese companies."
Shea adds: "However, it is also important to point out that the trade ban did not include electronics or electronics components, and some studies also suggested the revenue of Taiwan’s leading semiconductor manufacturers generated from China is also not substantial. Therefore, it is important not to speculate too much on political headlines and noises.
“Meanwhile, regime and regulatory shifts such as net-zero commitments from individual countries will have a positive impact on energy transition related themes. As such, distinguishing how profound [an effect] political issues can have on thematic investments is crucial.”
Active management
Andreas Fruschki, head of thematic equity at Allianz Global Investors, says that having a focus on long-term structural developments should not impede the active management of a thematic portfolio.
There are generally three layers of active management that guide the thematic investing principle.
First there is active stock selection, ie stocks with a high exposure to a theme. Additionally, the theme as such is subject to continuous review and adaption as different areas within a theme might develop at different speeds. For multi-thematic portfolios there is then the third layer: actively selecting the thematic exposure over the course of time.
Fruschki adds that this is why active management is a pre-requisite for successful thematic investing to control timing, diversification and the thematic purity of the investment.
He adds: “Political or regulatory developments can provide strong head or tailwinds to themes, even make or break themes. At the same time, portfolio managers will need to find a balance between the shorter-term developments and news flow and the longer-term structural expectations for a theme.”
This is also why Tim Morris, IFA at Russell & Co Financial Advisers, highlighted the importance of taking a long-term approach to thematic investing because it can take decades for new themes to really play out. In particular, he says it is important to allow more than five years when taking a long-term approach to thematic investing.
