Thematic Investing: More Than Just a Good Story

Strategies and Best Practices for Equity Portfolios

26 September 2024
3 min read

What You Need to Know

Big global trends such as technological disruption, urbanization and the energy transition offer exciting thematic stories for equity investors. But for thematic investing to work, investors need clear criteria to define lasting themes and a coherent process for building portfolios with real return potential and thematic purity. Above all, thematic portfolios must be constructed with the same rigor, discipline and risk-management controls as any active equity portfolio. 

US$834 Billion
Assets under management in thematic equities, globally, as of June 30, 2024*
7%
Estimated outperformance of US sectors related to the
cloud/e-commerce theme vs. S&P 500, 2009–2021
US$4.6 Trillion
Projected annual global infrastructure spending in 2040
Authors
Nelson Yu| Head—Equities
Daniel C. Roarty, CFA| Chief Investment Officer—Sustainable Thematic Equities
Lei Qiu| Chief Investment Officer —Thematic Innovation Equities
Jonathan Berkow| Director of Quantitative Research and Data Science—Equities

In an increasingly complex global marketplace where short-term thinking has become the norm, considering the transformative forces that are reshaping the world can offer investors a compelling approach to strong long-term return potential. Thematic investing provides a differentiated way to generate wealth in contemporary markets by strategically envisioning the future through an investment portfolio while tapping into the powerful, universal appeal of a good story.

From technological disruption to the energy transition, people naturally connect to stories about change that can foster investment returns. Yet the simplicity of a compelling story may be misleading. Translating a trend into investment success requires identifying shifts that will persist, developing a thematic opportunity set and carefully selecting securities that are likely to create sustainably higher profits over the long term. Investors must also pay close attention to the special nuances of thematic portfolio construction while thoughtfully evaluating how the strategy fits within a broader allocation.

The quest for new sources of return potential has made thematic portfolios popular in recent years. Attractive themes for equity investors span technological and social issues as well as challenges in the physical world, such as infrastructure development, climate change, and transformations in agriculture related to food scarcity and production.

Well-defined thematic trends should be related to long-term policy, physical or social shifts that aren’t always easy to spot as they begin to unfold. Generally, these types of themes have tended to prompt long-lasting capital investment cycles (Display) as companies see opportunities for growth. Our research of select major shifts over the past three decades shows that as each theme has progressed, the associated sectors have outperformed the broad benchmark by a wide margin. For example, during the fossil fuel supercycle that ran from 1999 to 2014, the energy sector outperformed the S&P 500 by 7% per year. More recently, technology stock returns outpaced the US market by a similar annualized margin during the cloud and e-commerce cycle that began in 2009.

Thematic Trends Tend to Spur Prolonged Equity Outperformance
Left chart shows capital expenditures of four major structural themes in the past 30 years. Right chart shows the annualized returns of associated sectors during each theme versus the S&P 500.

Current analysis and forecasts do not guarantee future results.
*Some cycles shown extend past the end-year of the cycle to illustrate that investment wanes after the cycle peak.
†Sector outperformance is based on the performance of the relevant GICS sector from the start of the first year through the middle of the last year versus the S&P 500. The fossil fuel supercycle is energy from January 1, 1999, to June 30, 2014; the China-driven commodity supercycle is materials from January1, 2000, to June 30, 2012; communications infrastructure is 50/50 weighted communications and technology from January 1, 1992, to June 30, 2000; and cloud/e-commerce is technology from January 1, 2009, to June 30, 2021.
As of March 31, 2024
Source: Bloomberg, IHS Global Insight and AllianceBernstein (AB)

But identifying themes is just a starting point. It’s easy to look back and identify periods of powerful investment cycles, but much harder to predict when a theme will take off—and when it will run its course. Critics argue that the appeal of a good story doesn’t always lead to good investments. They’re not entirely wrong. For thematic investing to work, we believe investors need clear criteria for defining lasting themes and a coherent process for building portfolios with real return potential. Above all, thematic portfolios must be constructed with the same rigor, discipline and risk-management controls as any active equity portfolio. In this paper, we explore the principles of effective thematic investing to help investors make informed choices about thematic portfolios and incorporating them into a broader asset-allocation strategy.

*Based on Broadridge data 

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.

MSCI makes no express or implied warranties or representations, and shall have no liability whatsoever with respect to any MSCI data contained herein.

The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.


About the Authors

Nelson Yu is a Senior Vice President, Head of Equities and a member of the firm’s Operating Committee. As Head of Equities, he is responsible for the management and strategic growth of AB’s equities business and investment decisions across the department. Since 1993, Yu has experience generating investment success in global equity markets by joining fundamental research with rigorous quantitative methods. He joined AB in 1997 as a programmer and analyst, and served as head of Quantitative Equity Research from 2014–2021. Since 2017, Yu also served as head of Multi-Style Core Equity strategies, with over $10 billion in assets. Most recently, he was CIO of Equities Investment Sciences and Insights, which brings together resources across Data Science, Quantitative Research, Advisory Services, Risk and Global Execution to deliver differentiated capabilities and insights to AB’s equities investment platform. Prior to joining AB, Yu was a supervising consultant at Grant Thornton. He holds a BSE in systems engineering from the University of Pennsylvania and a BS in Economics from the Wharton School at the University of Pennsylvania. Yu is a CFA charterholder. Location: New York

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 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

Jonathan Berkow is a Senior Vice President and the Director of Quantitative Research and Data Science in the Equities division at AB. He leads the research and adoption of alternative data in equity research and systematic strategies. Prior to joining the firm in 2018, Berkow was a systematic portfolio manager and researcher at hedge funds Element Capital Management and Kepos Capital. He started his career at Goldman Sachs Asset Management, where he managed quantitative research and was a portfolio manager for global equity portfolios. Berkow's research has spanned equities and macro asset classes. He holds a BS in economics from the Massachusetts Institute of Technology. Location: New York