There has been a significant growth in thematic investing in recent years. Of late, this has concentrated on the mega trend that is ESG.
Thematic investing is defined by the CFA Institute as selecting companies within various sectors that are relevant to a particular theme. This type of focused investing is a desire amongst investors for ideas and options that reflect their personal preferences and interests.
Social media, the influence of retail investment forums, the digitilisation of content and increased research information, has led to a dramatic democratisation of investing.
Shared knowledge has driven a shift in consumer and investor attitudes which poses a profound challenge to the traditional fund management and wealth/adviser business models.
The chart below shows the huge growth in assets for sustainable funds by quarter over the past number of years.
The growth of thematic funds outside of ESG is also significant. Asset managers are racing to launch thematic fund strategies that are focused on increasingly niche segments of particular themes, enabling investors to get ever more granular in their investments.
This once again is taking AUM away from more traditional funds and asset classes.
Morningstar's research shows that thematic investing - and possibly ESG investing - are fraught with potential risks.
Investors are making what in gambling is called a 'trifecta bet', one where the investors must pick the right theme, the right investment vehicle to get exposure to that theme, and finally get the timing right. None of these three elements are easy.
The chart below demonstrates the poor success that thematic focused funds have had over time with less than 10% of funds outperforming a broader benchmark over the longer term, and with more than 50% actually being closed down.
There is arguably a balance needed between emerging investor desire for greater relevance of their investments linked to their interests and passions, and the dangers of investing in new - and potentially risky - areas.
Investors will increasingly look for, and demand, more digital content and information, better optionality and personalisation and platforms that allow them to engage directly with their particular interests.
It may no longer be sufficient for wealth managers, asset managers and adviser firms to advocate that investors invest in a single fund or portfolio of their in-house fund solutions for the long term.
The idea that there is a one-stop shop strategy to suit many millions of investors, all profiled in the same risk/return bucket, may not reflect the options available through continued innovation.
Make it personal
Retail-focused platforms and new fintech entrants will observe these trends and will develop more innovative solutions and investing options for their customers. It seems plausible that further market share erosion will be witnessed from the more traditional advisor firms.
We are seeing this already in the US market where the advisory model portfolio marketplace has grown dramatically in the past few years as investors demand greater optionality and personalisation in their portfolios, and asset managers and wealth platforms launch model portfolios at an unprecedented rate.
Innovation around digital functionality, research, investment and educational content is key. Moving away from the 'one size fits all' product mentality to one which embraces solutions which accommodate more pluralistic, democratic and modular investor requirements will put investors in good stead, now and in the future.
Gavin Corr is global head of Morningstar's manager selection and due diligence services team
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