The availability of ever more sophisticated data sources has fueled the rapid growth in index-based thematic strategies at the expense of ‘active’ fund managers, according to a panel at the recent Qontigo Investment Intelligence Summit.
“Data availability has been incredibly important to the existence of thematic ETFs,” Rob Powell, Head of Thematic & Sector Product Strategy at BlackRock, told the audience at the Summit, held in London on May 5. A few years ago, “thematics was deemed to be un-indexable. So, when we launched our thematic ETFs in 2016, it was a big step in showing that you could have active-like exposure through an index. Integrating new data into themes is something that will continue to be important for the index industry.”
Thematic indices have garnered much interest as a way to target powerful, long-term and structural trends transforming our modern economies and societies. The indices rely on data sources including revenue segmentation, patents filing, and even inputs derived from artificial intelligence. Over the three years through 2021, assets invested in thematic funds worldwide nearly tripled to USD 806 billion, according to Morningstar.1 The funds now represent 2.7% of all assets under management in equity funds globally, up from 0.8% 10 years ago.
BlackRock launched its index-based thematic ETF suite in 2016 in collaboration with Qontigo. The partnership between the two firms now includes seven ETFs covering themes including ageing population, healthcare innovation, automation and robotics, digitalization, electric vehicles, digital security and smart city infrastructure, with a total of USD 8.9 billion in assets.2
“We are now looking at three, four, five different data sources” to build each thematic index, said Christoph Schon, Senior Principal at Qontigo’s Applied Research team, during the panel. “The quality of the data has got better, but also the availability, the range and the choice.” Thematic strategies must be imaginative, he added, as often themes are best captured via forward-looking data as opposed to backward-focused metrics.
“It is all about how companies evolve and how they adapt to the changing environment,” said Schon. “There is still a lot more to come” in thematic approaches.
Characteristics of thematic funds
BlackRock considers three common characteristics to select and design thematic portfolios, Powell explained during the presentation:
- All of its thematic funds are unconstrained in terms of where the manager or underlying index can invest to access the theme.
- All provide targeted exposure to structural growth and permanent change.
- They are, whether actively or index-based managed, designed to deliver long-term outperformance.
Active vs. passive
“Where you don’t have that good an access to data or companies, you need an active manager to be able to pick stocks that have a high level of thematic purity,” said Powell. “When we think of index approach, it would be a theme that is easier to define. ETFs offer a more constrained theme but diversified exposure to all companies that sit within that theme.”
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Qontigo’s Schon said that thematic investing has been more successful than sector-based strategies in capturing the upside of structural change. Economic sectors are too broad and diverse to accurately target the peculiarities of a world in flux, he said.
“The traditional sectors are no longer cutting it in the current environment,” said Schon. “Having a tech fund or investing in a technology index isn’t just enough anymore. What we need is something that is more targeted and that really captures and hones in on trends.”
The last couple of years have brought abnormal shifts in macroeconomic drivers, including lockdowns, the move to remote working and the race to net-zero, something that has benefited thematic investing, said Schon. In 2022, such type of disruption has only intensified: a jump in inflation, and the Ukraine conflict and sanctions on Russia are some examples of macro shocks. All of these have led to the outperformance of specific themes and to money inflows into their funds.
“What we have seen recently is the acceleration of many of the trends,” said the analyst, who mentioned digitalization, smart cities, smart city infrastructure, cybersecurity, automation and robotics, and electric vehicles among winning themes.
For BlackRock’s Powell, this year has shown that the thematics industry can weather a market pullback relatively well thanks to the breadth of its topics.
“The perception is that thematics is all about growth,” he said. “But what you’ve seen is outflows from areas such as technology and consumer, but quite big inflows into climate-related and security-related themes. On balance, there have been only moderate outflows from the industry. The industry has shown itself to be more resilient than some people would have imagined.”
A growing and evolving segment
Overall, thematic investing has evolved in the past quarter of a century, firstly from fund managers with a theme bias, to active thematic stockpickers, and since 2016 to thematic ETFs. And, as the panel noted, investors have also changed the way in which they integrate thematic investing — shifting the strategy from a niche and satellite option to the very core of portfolios.
“People are now looking at themes and megatrends as high-probability outcomes, and starting their portfolios with themes and then building the traditional allocations around them,” said BlackRock’s Powell. “Which is completely different to what was happening a few years ago.”
The ‘Thematic Investing in the Current Climate – What has Changed in 2022?’ panel was moderated by Nico Langedijk, Managing Director for Strategic Accounts at Qontigo.
Join us for other panels on thematic investing and more at the upcoming Qontigo Investment Intelligence Summit in New York.
1 Morningstar, ‘Global Thematic Funds Landscape Report,’ March 24, 2022.
2 Source: BlackRock. Data as of May 13, 2022.
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Part of the Deutsche Börse Group, Qontigo was created in 2019 through the combination of Axioma, DAX and STOXX. Headquartered in Eschborn, Germany, Qontigo’s global presence includes offices in New York, London, Zug and Hong Kong.