Author Details

Stuart Doole

Stuart Doole
Managing Director, MSCI Research

Kumar Neeraj

Kumar Neeraj
Executive Director, MSCI Research

Vishad Bhalodia

Vishad Bhalodia
Associate, MSCI Research

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A Thematic Lens for Portfolios

 

  • Thematic investing is one of the fastest-growing investment categories globally with ETF assets touching USD 100 billion and mutual funds exceeding USD 300 billion in Q3 2020.1
  • Thematic investing provides an accessible, macro narrative for fund allocation and performance — one steeped in trends transforming the economy and society — yet it is missing from traditional factsheets and portfolio tools.
  • Stock-level thematic exposures to a comprehensive set of megatrends for a broad security universe allowed us to characterize, for example, the positioning of the most and least successful growth-fund allocations and how they have changed over time.

 

Thematic, or megatrend, investing is an approach that seeks to identify longer-term, structural trends that could drive stock performance in a rapidly changing world. It is one of the fastest-growing investment categories globally, with ETF assets touching USD 100 billion and mutual funds exceeding USD 300 billion in Q3 2020. Investors in this space view the world with a range of perspectives. One view is to look at the world’s evolution through the prism of the underlying innovation in business models or technologies. Others take a more social or demographic approach, seeing the world evolving to reflect the needs of the millennial generation or patterns in urbanization. To some, these may seem to be competing bottom-up vs. top-down perspectives but in our view they are complementary. MSCI has reflected both within a holistic four-category product classification adopted for megatrend thematic exposures: transformative technologies; health and health care; society and lifestyle; and environment and resources.

Increasingly, themes are explicitly used by investment managers to express views: tilting toward certain megatrends and explaining allocations by using thematic exposures as a lens to gain additional insights into portfolio attributes. The core aim of thematic investing is to capture future growth opportunities. Hence, in this blog, we look at a universe of U.S. growth funds to understand how they have been positioned with respect to key megatrends and which ones are omitted. How have the best-performing funds been positioned with respect to the technology and health-care trends that have dominated the U.S. market during the COVID-19 pandemic?

 

Themes Matter

We match each of the 17 MSCI megatrends to a thematic category. We generate a concrete estimate of the economic linkage between any security in the MSCI equity universe and the theme in question, based on disclosed company business lines along with the corporate activity captured in business-description information. This relevance score ranges from 0% to 100% and can be used to profile the exposure of any index, ETF or fund to a category or an individual theme within. For our case study, we created a selection of U.S.-domiciled growth funds using MSCI Peer Analytics.2

Below, we split the fund universe into high- (Q4) and low-performance (Q1) quartiles. For the first half of 2020, we quantified the highly differentiated thematic positioning in next-generation internet, digital economy, millennials and disruptive technologies between the best- and the worst-performing funds (a much wider spread than in 2019). The thematic “beta” was a clear performance driver.

 

Thematic Exposure of US-Domiciled Growth Funds — Quartile Split by H1 2020 Return

 

We dig into the performance attribution below. For each individual theme, we take the top-quartile funds based on exposure, as of December 2019, and plot for each the percentage of funds that had above-average H1 2020 returns. More than 75% of the funds most exposed to next-gen internet, millennials, fintech, disruptive technology, digital economy or autonomous technology generated above-average returns during the first half of 2020. Conversely, growth funds were underexposed to health and health-care themes.

 

Growth Funds with Highest Theme-By-Theme Exposure: % of 2020 Peer-Group Outperformers

 

We can also analyze the thematic tilts of the largest growth funds versus the smallest.3 Funds with high assets under management (AUM) were relatively overweight themes like digital economy, millennials and next-gen internet; but, over the first half of 2020, the smaller growth funds more aggressively increased their exposure, particularly to the next-gen-internet theme. Not all large funds were exposed to large caps: If we cut the fund universe by size-factor quartiles, we see small-cap-tilted funds were more exposed to health-care tech and genomic innovation — and that grew through 2020.

 

Thematic Exposures of the Largest (LHS) and Smallest (RHS) Funds for Key Megatrends

 

Thematics and Factors

We can also extract the top- and bottom-decile growth funds based on their fund-level MSCI FaCS® exposure to the growth factor. The exhibit below shows a clear overweight of technology themes, such as digital economy and social themes, such as millennials for funds with the highest traditional growth exposure. However, not all megatrends were so well represented; omissions included robotics, genomic innovation and future education.

 

Thematic Exposure of Top- and Bottom-Decile FaCS® Growth Composite Funds

Data as of June 30, 2020.

 

Looking at the theme category level over time, we can see in the exhibit below that the exposure of the most “growthy” funds to the technology-influenced themes has been trending up since 2017, while exposure to health and health-care themes seems to have peaked, if anything, in 2019.

 

Quarterly Thematic Category Exposure of Top-Decile Growth Funds Composite

 

Is the Future Viewed Through a Thematic Lens?

Thematic investing is a fast-growing investment category, but currently lacks systematic tools to evaluate portfolio tilts and attributes. Here we use growth funds as an example to show how MSCI Thematic Exposure relevance scores can provide key insights that can help position growth funds alongside thematic funds as well as highlight key megatrends that drove growth-fund performance. However, the use case is not limited to growth funds only. The thematic lens can be critical in analyzing other categories of funds and strategies to provide complementary and actionable investment insights.

 

The authors thank Anil Rao for useful discussion in the preparation of this blog.

 

1Thematic funds’ assets under management is estimated based on Morningstar fund data, as of August 2020.

2U.S.-domiciled funds with 75% to 105% in equities, AUM of USD 10 to 500 billion and “growth” in the name, but without the words “value,” “income,” “dividend,” “yield”, “index,” “ETF,” “tracker” or “passive.” Total of 430. Study period from May 2012 to June 2020. Common funds used for like-for-like comparisons.h

3Quartile 4’s AUM spans USD 2 billion to 194 billion, and quartile 1’s AUM is up to USD 170 million, as of June 30, 2020.

 

 

Further Reading

Indexing change: Understanding MSCI thematic indexes

China Tech Investing: An Indexed Approach

The Digital Economy: Economic and business transformation through the growth of connectivity and digitization

The new computational revolution: Disruptive innovation and the next generation internet

The information age of medicine: Genomics-driven innovation as a catalyst for growth

 

Regulation