Thematic investing is becoming increasingly popular with investors looking to capitalise on trends: electric cars, green energy and biotech are just a few.
One of the main benefits of this approach is being able to invest without worrying about the risk of putting all your eggs in one Tesla (so to speak), but spreading them out across multiple companies driving your chosen sector forward.
But which companies do these funds invest in? Our analysts have collected the data, and we have taken a look at which UK stocks appear the most in these baskets.
But first: what is a thematic fund? These vehicles attempt to harness secular growth themes ranging between anything from demographic shifts to the rise of the metaverse.
Some have delivered bursts of eye-catching performance, while others have failed to gain traction. What’s certainly true is the global market for thematic funds has expanded rapidly.
According to Morningstar senior research analyst Kenneth Lamont, thematic funds have distinctive characteristics that mean a more tailored approach to due diligence is required.
For example, many thematic funds are risky by design, and include high levels of volatility. Investors on aggregate tend to be poor market timers, so caution is needed.
That said, many highly targeted thematic funds have shown themselves to be the less risky option when compared against single stock investments.
In a recent video, Lamont explained that choosing a basket instead of a single stock diversifies away some idiosyncratic and single stock risks: “what is in isolation still a risky investment compared to a broad equity index could actually be the less risky option.”
“You really want to understand where these fit within your portfolio. Something that is high beta or higher risk when added to a broad portfolio may actually decrease risk overall if it’s imperfectly correlated with some of your other investments,” he says.
In 2022, the most popular themes among investors were broad thematic (funds that can act on any theme as and when they see fit) and energy transition. The smaller “food” theme also saw big inflows, according to Lamont – unsurprising considering the global food situation and the war in Ukraine.
Most Popular Thematic Stocks
Which stocks are the most popular? We’ve looked at this two ways: the stocks held by the most funds, and the stocks held by the most themes.
In our chart, we’ve included all the UK-listed stocks currently held by at least 10 thematic funds – the bigger the marker, the more popular a holding it is. They’re arranged by how they performed last year.
The most popularly-held stock by far is AstraZeneca (AZN). It’s held by 73 funds, across five different themes: demographics, energy transition, consumer, life science and wellness. The healthcare company famous for its Covid-19 vaccine is the second biggest constituent of the FTSE 100 by market cap and managed to grow over 30% last year.
Shell (SHEL), the biggest FTSE firm, has had a bumper year, returning 48% according to our data, with a pre-tax profit of $16.44 billion. It’s only held by 15 thematic funds though (energy transition and fintech themes). But, this is more than BP (BP.). BP, which more than doubled its underlying replacement profit in 2022, is only held by eight funds and is therefore not included in our round-up.
Pearson (PSON) is the stock in the group with the highest return last year – one of the two FTSE 100 firms in the 50% club. The publisher is available through 14 different funds across energy transition, consumer and wellness themes. Some of our readers may also remember it being mentioned in the context of good ESG ratings and strong corporate governance.
Too Many Themes?
In order to count towards a theme, more than two funds need to be holding the stock.
For example, one fund that invests in the robotics and automation theme invests in AstraZeneca – but that’s not enough to classify the stock as a significant stock for the theme. In contrast, 29 funds that focus on life science hold the stock.
The most popular stocks that only appear in one theme each are Ceres Power (CWR), picked by 36 energy transition funds, and Pennon (PNN), picked by 34 resource management funds.
On the other side of the coin, the three other stocks that feature in five different themes, alongside AstraZeneca, appear in 26-29 portfolios rather than 73.
Is this a good thing? Lamont says a stock that is exposed to many themes may be an attractive investment as the company is clearly positioned to benefit from various thematic developments. Therefore, should one or two themes not play out as anticipated, this may be offset by exposure to themes that do.
“On the other hand, the more themes a stock is exposed to the less focused that stock is likely to be on one theme, making that stock a poor tool for gaining exposure to a single theme,” he says.
How to Be a Successful Thematic Investor
Despite all the enthusiasm for thematic funds, it’s important to keep things in perspective.
Historically, thematic funds have underperformed their benchmarks, and the concentrated nature of thematic funds also tends to cause higher volatility returns. It is important to be careful and do your research. To be successful, you should consider these three things:
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