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Anil Rao

Anil Rao

Executive Director, MSCI Research

Stuart Doole

Stuart Doole

Managing Director, MSCI Research

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The Pace of Fast Change: Growth vs. Thematic Investing

  • Asset allocators could be considering adding thematic funds alongside traditional growth funds, as there are key distinctions between them.
  • Thematic classification can be used to identify underlying megatrends that portfolios are exposed to. In our example, a thematic index’s exposures complemented those of a growth index.
  • We found many thematic stocks had risks related to investment quality, residual volatility and momentum. Reversals in these factors’ recent behavior could expose investors to drawdowns.

Growth stocks trounced the broad market in 2020 as the MSCI ACWI Growth Index outperformed the broad-market MSCI ACWI Index by 17%. That continued a longer term trend of firms with growing sales and earnings lapping the rest of the field. Not to be outdone, a relatively newer entrant, thematic investments, fared similarly. Many of the funds based on thematic indexes outraced both the broad market and growth funds, while enjoying heady inflows throughout the year.1

Asset allocators could be considering funding thematic investments to gain exposure to firms whose fortunes may not be captured by fundamental growth measures. For these investors, the questions arises: What are the key opportunities – and challenges – that distinguish thematic from growth investing?

The thematic options available to investors and allocators are wide-ranging. In this second blog in a series, we use the multi-themed MSCI ACWI IMI Innovation Index2 (‘Innovation’), to highlight key megatrend, industry and factor characteristics of growth and thematic investing.


A Thematic Lens Revisited

Risk and return characteristics provide one lens through which to view differences between growth and thematic indexes. From May 31, 2008, to Feb. 26, 2021, the ACWI IMI Innovation Index delivered a higher return than the ACWI Growth Index, but with the drawbacks of higher volatility, more concentration and richer valuations. These are shown in the table below.


Characteristics of MSCI Growth vs. Innovation Indexes

  ACWI ACWI Growth ACWI IMI Innovation
Total return (%) 6.9 8.9 16.7
Total risk (%) 17.3 17.1 21.0
Active return (%) -- 2.0 9.8
Tracking error (%) -- 3.0 10.4
Number of constituents* 2964 1270 525
Trailing price to sales* 2.1 4.2 8.7

Data from May 30, 2008 to Feb. 26, 2021. Simulated gross returns annualized in USD. * As of Feb. 26, 2021.


A thematic lens or profile reveals a more nuanced comparison. In our first blog in this series, we identified common attributes of successful, active growth managers by linking a firm’s revenues to economic trends. This classification is complementary to traditional classification schemes such as the Global Industry Classification Standard (GICS®)3 in that a single firm can be exposed to multiple themes. Similarly, a single theme, such as genomics, can span multiple industries or geographic regions.4

The exhibit below shows the thematic exposures for the MSCI ACWI, Growth and Innovation Indexes, with some notable differences between each highlighted in red.

We can see see in the exhibit below that the Growth Index (yellow bars) tended to follow the thematic profile of the ACWI Index (blue bars), but with higher exposures. This is by design as the Growth Index is a market-capitalization-weighted carveout of the broader ACWI Index.

In contrast, and also by design, the Innovation Index (turquoise bars) had high exposure to several of the largest themes in the Growth Index, but also significant exposure to others such as disruptive technologies, financial technologies, digital health and genomics.


Thematic Profile

As of Feb. 26, 2021. Thematic relevance scores can aggregate to greater than 100% due to shared keywords between individual themes.


A traditional industry group comparison, shown in the exhibit below, misses these gradations by clubbing together many of the firms into the software & services industry group. By weight, 30% and 20% of the Innovation and Growth Indexes, respectively, fall into this colossal group.


Industry Group Profile

As of Feb. 26, 2021

The Innovation Index tended to also have more consistent exposure to its principal themes, shown in the exhibit with historical exposures below. Prior to the success that technology-related mega-cap stocks had in 2020, the exposures of the Growth Index to the autonomous industry, digital economy and internet themes were historically much lower than where they stand today.


Historical Thematic Exposures


The Factor Footprint

One challenge asset allocators to thematics will likely navigate going forward is the factor profile of “innovative” firms. While these businesses appear poised to potentially benefit from longer term economic transformations, the MSCI Global Equity Factor Model (GEMLT) reveals nearer-term considerations.

There are three factors worth highlighting, shown in the red text in the exhibit below.


Factor Profile of MSCI Growth vs. Innovation Indexes

As of Feb. 26, 2021. Exposures are relative to the MSCI ACWI Index. The dashed horizontal lines at +/- 0.2 indicate the threshold between a meaningful and incidental exposure.


Investment Quality. The Innovation Index had significantly lower exposure to investment quality than the Growth Index. This is a factor that reflects management decisions, such as the tendency to issue new, dilutive shares or grow the balance sheet through acquisitions and capital expenditures. Higher quality firms have historically outperformed those of lower quality.

Residual Volatility. The Innovation Index had higher residual volatility exposure. This represents firms with historically high price volatility, and whose returns were not largely driven by the broad market. While 2020 was a year of plenty for this factor’s return, it has been an unrewarded bet in most periods.

Momentum. The Innovation Index had higher momentum exposure, reflecting recent investor sentiment. While it has been a rewarded bet historically, it comes with the risk of sudden reversals.

Additionally (not shown) we found that an equally weighted portfolio comprised of the 10 largest thematic ETFs by AUM showed a similar factor profile as the Innovation Index.

When we looked at a longer exposure history for each of these three factors, we found the Innovation Index’s exposures became significantly more pronounced (compared to its history) in 2020.


Comparing Factor Exposures Over the Long-Term

Exposures are relative to the MSCI ACWI and are from December 2016 to February 2021.


If You Don’t Stop and Look Around Every Once in a While, You Might Miss Something

In summary, investors looking to keep pace with potentially transformative firms, may find it useful to create thematic, industry-group and factor profiles to help distinguish thematic funds from growth funds.


The authors thank Vishad Bhalodia and Neeraj Kumar for their contributions to this post.



1Liu, E. 2020. “Active, ESG, and Thematic ETFs Were 2020’s Big Winners. Expect More.” Barrons.

2MSCI ACWI IMI Innovation Index constituents are firms with revenues associated with autonomous technologies, financial technologies, internet-based products and services and genomics.

3GICS, the global industry classification standard jointly developed by MSCI and Standard & Poor’s.

4MSCI themes follow a rules-based methodology based on contextual similarity to keywords. A portfolio’s thematic score is the weighted average of stock-level exposures to each theme.



Further Reading

A Thematic Lens for Portfolios

Heavy Is the Head that Wears the Crown: Industry Concentration in the US interactive chart

Flight to Quality: Understanding Factor Investing