Thematic investing has always been popular with Canadian investors looking to capitalize on trends: cryptocurrencies, marijuana, electric cars, green energy, and biotech are just a few.
The CFA Institute admits that thematic investing is like “venture capital for asset managers”, and that it “isn’t just performance chasing, it’s performance chasing with a narrative. Although there’s no standard definition, thematic investing tends to be about capturing the zeitgeist. Or trying to.” The institute adds that themes are typically about change, like a country evolving from a frontier to an emerging market, a sector that's dramatically transforming, or a new technology seeing widespread adoption.
In the last Global Thematic Fund Landscape, Morningstar researchers Ben Johnson, Kenneth Lamont and Daniel Sotiroff defined the universe of thematic funds as those that select holdings based on their exposure to one or more investment themes.
Thematic funds offer investors opportunities to capture well-publicized macro or micro trends that claim to transcend business cycles. Kenneth Lamont, senior manager research analyst at Morningstar, thinks that the vast menu of thematic funds (and their common holdings) provide insights into “the world through a thematic lens.” In his latest research on thematic funds managed and sold globally (excluding mainland China-domiciled funds), Lamont finds that the most-held stocks across the globe are growth-oriented and have technology story elements.
Alphabet Stock Is the Most Widely Owned in the World
Alphabet (GOOGL) is the most owned stock in the thematic world. 17 different groups of thematic funds own the parent company of the search engine Google, amounting to about 417 funds. Microsoft (MSFT) and Nvidia (NVDA), a graphics processing unit maker, are both in 414 funds. As many as 367 funds invest in e-commerce behemoth Amazon (AMZN).
Lamont told my colleague Kate Lin: “The reason we see many technology stocks is that this is the element that holds future trends together. Some of these businesses also tie and unify multiple technologies that enable and give a boost to a secular shift of technological advancement. The future of businesses pegs to the understanding of data and communications and such technologies.”
The Most Popular Canadian Stocks Held by Thematic Funds
In order to count towards a theme, more than two funds need to be holding the stock. Lamont told my colleague Sunniva Kolostyak that a stock that is exposed to many themes may be an attractive investment as the company is clearly positioned to benefit from various thematic developments. Therefore, should one or two themes not play out as anticipated, this may be offset by exposure to themes that do. "On the other hand, the more themes a stock is exposed to the less focused that stock is likely to be on one theme, making that stock a poor tool for gaining exposure to a single theme," he says.
Which stocks are the most popular? We’ve looked at the 10 top stocks held by the most themes and then looked at how many funds held these names. Here are the results:
Morningstar analysts cover 6 of the ten stocks on this list.
The most held stock by far is Shopify (SHOP). It is held by 126 funds across the themes of resource management, robotics + automation, next-gen communications + digital infrastructure, energy transition, digital economy, logistics + transportation, consumer, artificial intelligence + big data, fintech, cloud computing, cyber security, life sciences, and post-corona. Only one other stock is present across as many themes, and that is Blackberry (BB), which is held by 54 funds across the themes of robotics + automation, next-gen communications + digital infrastructure, energy transition, digital economy, artificial intelligence + big data, future mobility, fintech, cyber security, and security.
One of the stocks on the list is also one of Morningstar’s ‘Best Ideas’ – Lithium Americas (LAC). The stock is held by 26 funds, in themes including resource management, energy transition, future mobility, battery technology, nanotechnology and new materials.
How to Be a Successful Thematic Investor
In Canada as well as elsewhere, higher fees charged by thematic funds have contributed to their relatively poor performance over longer periods. Morningstar’s Global Thematic Fund Landscape Report notes that because of their narrower exposure and higher risk profile, thematic funds are best used to complement rather than replace existing core holdings. These funds might be considered single-stock substitutes for those investors looking to express a view on a theme but lacking the resources needed to conduct due diligence on individual companies.
Lamont told Kolostyak that thematic funds have distinctive characteristics, meaning a more tailored approach to due diligence is required. For example, many thematic funds are risky by design and include high levels of volatility. Investors on aggregate tend to be poor market timers, so caution is needed.
In a recent video, Lamont explained that choosing a basket instead of a single stock diversifies away some idiosyncratic and single stock risks: "what is in isolation still a risky investment compared to a broad equity index could actually be the less risky option. You really want to understand where these fit within your portfolio. Something that is high beta or higher risk when added to a broad portfolio may actually decrease risk overall if it's imperfectly correlated with some of your other investments," he says.
Investors in thematic funds are making a trifecta bet. They are betting that they are: 1) picking a winning theme; 2) selecting a fund that is well-placed to survive and harness that theme, and 3) making their wager when valuations show that the market hasn't already priced in the theme's potential. It is difficult, if not impossible, to consistently get all three right.
