Surfing megatrends with thematic funds

Artificial intelligence (AI) is the topic of the moment. There is hardly an area of life in which this future technology is not leading to fundamental changes - from healthcare and science to the construction industry. It remains to be seen where the journey will take us. The only thing that is undisputed is that it is a megatrend that will shape the future of humanity.

Those who surf this wave are likely to be among the winners. Those who miss out on the trend may lose out. This applies not only to companies that benefit from the growing demand for AI solutions. Investors can also seize the opportunity and participate in the upswing of companies with the help of thematically focused investment funds.

Lucrative investment themes

Whether artificial intelligence, climate change or the growing global demand for fresh water, there is a wide range of interesting thematic investment vehicles to choose from. Nevertheless, investors should not jump haphazardly on every moving "fashionable bandwagon" if their investment is to bear fruit. What is needed is a careful selection, a high level of expertise in implementation and the right timing.

The fact that thematic funds can be extremely lucrative is shown not only by the development of products focusing on AI and big data, which, according to the fund analysis company Morningstar, gained an average of over 24 per cent in one year as at the end of November 2023. Climate protection and water also achieved a remarkable performance, in some cases over a period of decades. For example, the "S&P Global Water" index - one of the most popular indices in the water sector - has gained 248.8 per cent since its launch in 2007, according to Bloomberg.

It is no wonder that thematic funds are becoming increasingly popular with investors. This is also reflected in the high inflows of funds recently recorded by the funds available in Switzerland. In the past three years alone, net inflows of funds totalled CHF 69.3 billion. Together with the market­movements, this led to assets under management in theme­-related investment vehicles of around CHF 226 billion (as at 30 September 2023). Compared to 2020, this corresponds to an annual increase of 9.3 per cent. In the same period, "just" 3.1 per cent flowed into the other actively managed funds each year.

In addition to the opportunity for above-average returns and the focus on a long-term, forward-looking megatrend with corresponding growth and success prospects, there are other good reasons why thematic funds are so popular with investors: By focusing on selected developments and megatrends, they overcome the traditional boundaries of investment funds - just as many companies themselves are no longer only active in one sector or geographical region. Thematic approaches are therefore increasingly being used to capture the growth drivers of such companies holistically.

Expertise and experience

Active thematic strategies offer a further advantage: By choosing such thematic funds, investors benefit from the in-depth knowledge and specialised expertise of the analysts and portfolio managers involved, who have been dealing with the relevant megatrends and developments on a daily basis and usually for some time.

As a pioneer in the field of sustainable thematic funds, the experts in asset management at Zürcher Kantonalbank, for example, have been focussing on developments and innovations in the areas of climate protection and water for over twenty years. In the latter, the focus is on companies that can make an important contribution to solving the problem of water scarcity and securing the supply of water. With regard to climate change, the fund specialists are focussing on companies with a solid business and sustainability strategy whose products or services are likely to overcome the challenges posed by climate change.

However, anyone interested in buying a thematic fund should also bear in mind that certain funds may be subject to greater fluctuations than broadly diversified products due to their focussed focus on certain themes or sectors. As a rule, they react to market changes with more pronounced price fluctuations. This also means that thematic funds have a lower correlation to traditional investments and react differently to changes on the financial markets. This characteristic can prove very useful for the diversification of a portfolio: If thematic products are added to a core portfolio of traditional investments, they help to reduce the risks of the entire portfolio.

Time of entry is key

Finally, investors should also look into the topic themselves. Not at a securities level - this is the responsibility of the experts from research and portfolio management - but rather in order to be aware of the growth prospects, the competitive situation and, above all, the risks associated with the topic. This also includes the right time to enter the market. Anyone who invests in a fund with a narrow thematic focus at the height of a hype is likely to find it much more difficult to achieve the desired return with the product than if the securities in the investment vehicle are favourably valued. It is therefore advisable to always take a look at the valuation and not just the topicality of the thematic area.

Against this backdrop, competent and comprehensive advice is an important prerequisite when selecting the relevant products so that interesting themes ultimately prove to be attractive for a portfolio. Whichever future topic and future market investors ultimately decide in favour of: Thematic investments are an easy way to invest in strong, long-term megatrends that are changing the world and offer investment opportunities.