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Erratic thematics

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While thematic investment funds have become hugely popular in recent years, investors need to treat them with caution, according to Nick Wood, head of fund research at Quilter Cheviot.

He writes that thematic funds are investments that allocate towards a specific theme or a number of themes, such as clean energy, the metaverse or electric vehicles. According to Global X, 2021 saw thematic ETFs record USD12.5 billion of net inflows, while in the US this number was a staggering USD44.3 billion. The most popular themes with investors included climate change, big data and disruptive technologies.

However, while thematic investing has clearly become more popular in recent years, Wood believes investors should tread very carefully as it is an easy area to get things wrong, particularly in an environment where growth stocks are struggling. 

“Many thematic funds will naturally be more growth biased and may have overlapping holdings,” Wood says. “With value having taken the lead from a style perspective, I suspect there are far fewer thematic funds performing well in that environment.”

Even with performance struggles, investors will have found it difficult, according to Wood, to catch the right long-term theme at the right time over the years.

Wood quotes recent data from JP Morgan that has shown that a basket of 1000 thematic funds has significantly underperformed the MSCI ACWI index over the last 16 years.

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