Pets, Pop and Sin Stocks: Not Every Fad Is a Thematic Portfolio

12 December 2024

2 min read

Daniel C. Roarty, CFA| Chief Investment Officer—Sustainable Thematic Equities

Lei Qiu| Chief Investment Officer —Thematic Innovation Equities

Many hot trends have been turned into equity portfolios. But fads aren’t investing themes and may be flawed as standalone investments.

What do pet lovers, Korean pop music and sin stocks have in common? Each is the subject of dedicated investment portfolios that aim to capitalize on offbeat trends. From the growing industry of pet-care products and services to the enduring appeal of booze and gambling, these types of portfolios aim to attract niche investors who want to channel their money toward areas of personal affinity and apparent return potential.

But not so fast. Such narrow areas fall short of our basic criteria for investable themes. They don’t benefit from a big trend that spurs spending over years, and they may not offer enough business diversity to allow for the construction of portfolios with high-quality companies and diverse sources of returns. In our view, fads simply don’t provide a sound foundation for long-term equity investment.

Some Sector Funds Are Thematic Strategies

What about sector-specific funds? Portfolios that focus on sectors such as healthcare and technology are popular vehicles for tapping into trends. Some investors may not consider sector portfolios to be thematic investments. We think it depends on how the portfolio is designed and constructed. For example, a weakly defined utilities-focused portfolio might hold stocks in the same sector that have very different growth trajectories, such as a nuclear utility and a coal utility.

In contrast, portfolios that clearly define a philosophy and process for capturing trends within a sector could qualify as a thematic investment approach, such as a technology fund focused on enablers of innovative disruption. In healthcare, a portfolio designed to target high-quality businesses that are exposed to long-term healthcare trends such as longevity and medical technological advances—rather than trying to predict scientific success—can provide access to the attractive growth and return potential prominent in the sector.

What About AI?

AI is a case in point. For investors, what’s most important is how a portfolio defines AI as a theme and searches for opportunities. Without a coherent definition, an AI-focused portfolio could pile into a few heavyweight US mega-cap companies, which could leave investors without sufficient diversification to manage risk. And while AI is clearly a powerful theme, investors should be careful to avoid faddish stocks that are riding on the wave of enthusiasm for the technology without having a quality business or a clear path to growth. We think a thematic portfolio driven by the AI revolution must first explain the types of companies it will target in order to build an allocation that offers strong risk-adjusted return potential.

Thematic portfolios can tap into stocks from different sectors that benefit from a trend. The relevant companies may change over time. Consider climate-focused investing—it draws on a theme with a very long duration, yet the technologies and growth areas within it are likely to evolve. Opportunities tied to security themes, such as cybersecurity or defense, could similarly evolve as regulations change and the political backdrop for relevant industries shifts. Identifying long-term themes can help reduce reliance on short-term macroeconomic outcomes while gaining resilience from slow but steady transitions that are less vulnerable to rapidly changing fashions and market whims.

This blog is based on our recent white paper, entitled: Thematic Investing: More Than Just a Good Story.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Daniel C. Roarty, CFA

Daniel C. Roarty is the Chief Investment Officer of AB’s Sustainable Thematic Equities team, which manages a suite of geographically diverse strategies aligned to long-term sustainable themes. Over the years, Roarty has played an active part in the sustainable investing community, acting as a subject-matter expert around the globe, including speaking at the 2018 Sustainable Investing Conference at the UN. He joined the firm in 2011 as global technology sector head on the Global/International Research Growth team and was named team lead in early 2012. Roarty previously spent nine years at Nuveen Investments, where he co-managed both a large-cap and a multi-cap growth strategy. His research experience includes coverage of technology, industrials and financials stocks at Morgan Stanley and Goldman Sachs. Roarty holds a BS in finance from Fairfield University and an MBA from the Wharton School at the University of Pennsylvania. He is a CFA charterholder. Location: New York

Lei Qiu

Lei Qiu is the Chief Investment Officer for Thematic Innovation Equities and is responsible for the AB Global Disruptors and International Technology Portfolios. She has been a portfolio manager at AB since 2016 and was previously a senior research analyst, focusing on the technology, media and telecom sectors. Prior to joining the firm in 2012, Qiu was the founder and the managing partner for three years of Phidias Capital Management, a technology-focused asset-management company. From 2003 to 2009, she was a general partner and senior research analyst at Andor Capital Management, and from 2000 to 2002, she was a research analyst at Chilton Investment Company. From 1995 to 1997, Qiu worked as an investment banking analyst at Goldman Sachs & Co. She holds a BA in economics (magna cum laude) from Smith College and an MA in business economics from Harvard University. Location: New York

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Pets, Pop and Sin Stocks: Not Every Fad Is a Thematic Portfolio

Some Sector Funds Are Thematic Strategies

What About AI?

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