Morningstar - Q1 2023 - 28

Spotlight: Thematic Investing
EXHIBIT 1
Thematic Boom Since the COVID-19 pandemic, thematic funds have attracted
large amounts of assets.
Assets of Global Thematic Funds by Quarter
$1,000B
250
500
750
12/2012
12/2014
12/2016
12/2018
Note: China-domiciled funds have been excluded from the calculation because of inconsistencies in reported assets.
Source: Morningstar Direct. Data as of Sept. 30, 2022.
12/2020 09/2022
gSteady improvements in the quality and granularity
of financial data mean that highly targeted
indexes and investment strategies can now be
constructed and maintained.
gThe megatrends of mass customization and the
democratization of finance have also played
a part. The highly targeted nature of some
thematic funds allows investors to fine-tune their
portfolios to match their investment preferences
and to align with their beliefs. The rise of low-fee
or commission-free trading on platforms like
Robinhood HOOD in the United States and the
rise of ETF investing more broadly have increased
retail investment flows. Retail investors have
historically been attracted to thematic investments
by their strong narratives, which have
contributed to the success of stocks and funds
connected with themes.
60
poorly understood segment of the fund universe
and attempt to answer the most pressing
questions asked by investors considering an
allocation to thematic investments.
40
What's Driving the Boom?
For decades, thematic funds represented only a
fraction of total global equity funds in number
and size. Only in the past five years have thematic
funds attracted assets on a global level,
with the growth registered during the COVID-19
pandemic being nothing short of spectacular.
Thematic funds have tripled their share of
global equity fund assets to 2.9% in the 10 years
to mid-2022 ( EXHIBIT 1 ).
20
-20
1996
2001
2006
The recent boom in thematic investing has been
driven by several key developments:
gCompanies with exposure to certain potentially
world-changing, winner-take-all technologies
have benefited from rapid growth and
soaring stock prices. These have offered investors
outsize returns, which has attracted still
more flows. This was particularly obvious in the
30%
15
Morningstar
Global Markets
1 Bérubé, V., Ghai, S., & Tétrault, J. 2014. " From Indexes to Insights: The Rise of Thematic Investing. " McKinsey & Co. Dec. 1.
28
Morningstar Q1 2023
Closures
Launches
initial stages of the pandemic, when most
thematic exchange-traded funds outperformed the
broad market by a comfortable margin. For
example, WisdomTree Cloud Computing ETF WCLD
returned 109% in 2020, while the Morningstar
Global Markets Index returned a comparatively
measly 16%.
gFundamental changes in the way the global
economy functions have supported the
growth of thematic investing, suggesting that
the " metabolic rate " of the economy is
accelerating, with industry dynamics evolving
faster than ever and profit pools shifting
across value chains in many industries.1
2011
2016
How Should Investors Assess Thematic Funds?
The fundamental fund characteristics
that boost the chances of achieving long-term
investment success-such as low fees, a
seasoned management team, and a trusted parent
organization-still apply and should form the
foundation of any evaluation. That said,
the distinctive characteristics of thematic funds
require a more tailored due diligence.
To help, we developed a framework that can
be used when assessing thematic funds.
The framework breaks down a thematic fund
investment into three key parts.
2022 Growing
irrelevance of geographic and sector groupings
in a globalized world means that where a
stock is listed can have little bearing on where
it sources its revenue. For example, Londonlisted
BP BP derives a fraction of its revenue from
the United Kingdom. Equally, sprawling tech
giants that operate in a kaleidoscope of
emerging and existing industries are testing
the traditional sector classification frameworks
like never before.
1 Analyzing the Theme
First and foremost is the theme itself. A robust
theme should be logical. Is the narrative
convincing? Is there a coherent and compelling
growth story behind the strategy? Is there
data to back it up?
A robust strategy should be loose enough to adapt
as the theme inevitably evolves. As timely as
they may seem now, some themes will age poorly.
Investors must ask themselves: Will that workfrom-home-
or trade-war-themed fund still be
Number of Funds
Assets
https://www.morningstar.com/stocks/xnas/hood/quote https://www.morningstar.com/etfs/xnas/wcld/quote https://www.morningstar.com/stocks/xnys/bp/quote

Morningstar - Q1 2023

Table of Contents for the Digital Edition of Morningstar - Q1 2023

Contents
Morningstar - Q1 2023 - Cover1
Morningstar - Q1 2023 - Cover2
Morningstar - Q1 2023 - Contents
Morningstar - Q1 2023 - 2
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Morningstar - Q1 2023 - Cover3
Morningstar - Q1 2023 - Cover4
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