Getting Smart About Thematic Allocations: Insights for Wealth Managers
- Wealth managers can use thematic exposure and correlation analysis to identify themes that complement core allocations, meaningfully increase target exposures and help manage portfolio risk.
- Allocating to investment themes that are underrepresented in a typical core equity allocation, such as demographic trends, improved historical performance and enhanced thematic diversification in simulated wealth portfolios.
- Analyzing thematic overlap and return correlations helps pinpoint themes that may offer differentiated exposures to a core equity allocation, supporting both risk management and targeted thematic exposures.
A recent MSCI survey found that global investors expect financial advisers to align portfolios not only to benchmarks but to specific client-defined themes related to transformative global trends. To explore the potential portfolio implications of this shift, we modeled the impact of selected thematic investment strategies — technology, demographics and sustainability — on a hypothetical equity allocation.
We used the MSCI ACWI Index to represent a core global equity allocation and modeled thematic exposures using representative indexes. Exposure to AI stocks is proxied by the MSCI ACWI IMI Robotics & AI Index. To reflect potential interest in key demographic trends, we used the MSCI ACWI IMI Ageing Society Opportunities Index. Clean-energy themes, including alternative energy, energy efficiency, smart grids and future fuels, are represented by MSCI ACWI IMI Clean Energy Infrastructure Index. Wealth clients’ interest in luxury goods is modeled using the MSCI ACWI IMI Textiles Apparels and Luxury Goods Index.1 Finally, we proxy a more diversified thematic allocation through the MSCI ACWI IMI Innovation Index, which blends exposures across four innovation-related megatrends: technology, automation, financial technology and genomics.2
The historical risk and return of these individual allocation choices have differed greatly, with the robotics and AI index having the highest performance over the last nine years.
Recent research shows that individual thematic indexes designed to represent a single investment trend may be concentrated3 and exhibit relatively high turnover (up to 25% per year, historically, for the selected indexes). These indexes also showed elevated tracking error (TE) relative to the core equity allocation. The aging-society index had the lowest TE at 6.4%, while the clean-energy-infrastructure and luxury indexes had the highest, at 10.1% and 12.9%, respectively.
Each thematic index exhibited a historical return correlation above 0.8 with the MSCI ACWI Index, indicating potential concentration risk when adding a single theme to equity allocation. We also analyzed historical active return correlations between the theme proxies and core equity allocation, where lower or negative values would suggest potential diversification benefits.
MSCI data from Nov. 30, 2016, to May 30, 2025. Correlations of monthly returns between selected MSCI thematic index and the MSCI ACWI Index.
Historical active return correlations between the thematic indexes were low, with the exception of the innovation and the robotics and AI indexes, which showed a higher degree of overlap. As a result, combining the latter two themes with the core equity allocation did not provide portfolio risk diversification.
We used MSCI Thematic Exposure Standard (TES) relevance scores to assess the alignment between the thematic profiles of the selected indexes and the core equity allocation. This helps identify how adding a thematic investment might affect a portfolio’s overall thematic concentration.4
We first measured the cross-sectional correlation between the 16 relevance scores for each thematic index and those of the MSCI ACWI Index. High thematic cross-sectional correlation to the MSCI ACWI Index indicates higher alignment (similarity) between the investment theme and the core equity allocation.
Robotics and AI and innovation had the highest thematic similarity to the core equity allocation. In contrast, the relevance-score profiles of the aging-society index was least similar to core equity.5
MSCI data from Nov. 30, 2016, to May 30, 2025. Monthly cross-sectional relevance score correlations between thematic indexes and the MSCI ACWI Index.
We also calculated the historical average of individual relevance scores and historical correlations between each thematic relevance score for the index and its counterpart in the core equity allocation. The technology-related relevance scores showed high historical correlation with the core equity allocation. The aging-society index naturally had a high corresponding relevance score, low cross-sectional thematic correlation to core equity and negative active return correlation to other thematic investments in our analysis. This suggests that adding the aging-society theme to the core equity allocation could add diversification as well as thematic exposure to the portfolio.
We created hypothetical equity plans incorporating 10% and 20% allocations to single-theme indexes as well as equal-weighted combinations of multiple themes.
MSCI data from Nov. 30, 2016, to May 30, 2025. Gross monthly returns annualized in USD.
Adding thematic allocations with high active return and high relevance-score correlations, such as AI and innovation, to a core equity allocation led to an increased overall risk and return, but did not meaningfully shift the portfolio’s thematic exposure toward technology. In contrast, blending core equity with low or negative active return correlation themes, such as a mix of AI and aging society, produced portfolios with the same level of risk and higher historical performance compared to the core allocation, while increasing exposure to the underrepresented aging-society theme.
MSCI data as of May 30, 2025. Relevance as percentage change of the corresponding relevance score of the hypothetical equity plan relative to core equity allocation, as measured by the MSCI ACWI Index.
Our analysis suggests that allocating to themes with low thematic cross-sectional correlation and low or negative active return correlation to the core portfolio, such as clean-energy infrastructure or aging society, can enhance the thematic exposure and diversification in equity portfolios.
The Power of Rules: Model Portfolios and Wealth Management
For wealth managers and financial advisers seeking customized solutions to meet growing client demand, rules-based management approaches for model portfolios may offer opportunities to improve on traditional management approaches.
The Pace of Fast Change: Growth vs. Thematic Investing
Investors considering thematic investments to gain exposure to firms whose fortunes may not be captured by fundamental growth measures, may ask: What are the key opportunities – and challenges – that distinguish thematic from growth investing?
Innovation Investing and Equity Allocations
Innovation investing has gained momentum over the past few years. Our research focuses on systematically investing in companies that seek to capitalize on opportunities created by megatrends and innovation-driven themes.
1 This is an MSCI GICS®-based industry index rather than a more specialized index. Luxury-goods stocks are a common preference among affluent wealth clients. GICS is the industry-classification standard developed by MSCI and S&P Dow Jones Indices.
2 The MSCI ACWI IMI Innovation Index comprises the MSCI Autonomous Technology & Industrial Innovation, Genomic Innovation, Fintech Innovation and Next Generation Internet Innovation Indexes.
3 The lowest number of stocks was associated with the clean-energy-infrastructure theme — an average of 261 during the study period of our study. Luxury goods, a GICS index, contained 129 stocks.
4 In the paper A Roadmap to Personalizing Model Portfolios: Scaling with Purpose, we showed the importance of measuring core equity’s characteristics relevant for portfolio personalization.
5 The pairwise cross-sectional relevance-score correlations across all combinations of investment themes (correlation matrix not reported here) were negative between the aging-society theme proxy and all other theme proxies. The same was found for clean-energy infrastructure and luxury.
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