Thematic investing: is it one of the best ways to outperform passive investing?

Investors are increasingly interested in thematic investing. All the more so at this time of year when portfolios are often being appraised and evaluated and many investors plan for this year. I’m interested in some thematic funds and basing some of my individual share purchases on themes as well. Before doing so the big question to ask is: could thematic investing outperform passive investing? Put another way, will it help me potentially make more money?

What is thematic investing?

Let’s start with the basics first. What is it? Asset management giant Blackrock describes it as: “Thematic investing is an approach which focuses on predicted long-term trends rather than specific companies or sectors, enabling investors to access structural, one-off shifts that can change an entire industry.” This definition works perfectly for me.

It’s worth noting early that they’re often narratives about the ‘next big thing’ in 5, 10, or even 20 years’ time. This is the polar opposite of day trading.

Could thematic investing outperform passive investing?

Investors who bought into hydrogen shares in 2020 did very well, although less so last year. Those investors will have to see what the future brings to learn if backing the theme is worthwhile or not. Likewise, renewable energy shares more generally can be a) hard to define and b) have a mixed record.

Thematic investing isn’t easy or a guaranteed shortcut to big gains. It still requires research, patience, and perhaps some luck. But I would expect thematic investing to help me beat the market overall, especially if I invest for the long term. 

I think thematic investing could be better than passive investing because it requires trying to pick the best stocks possible and is more likely to help investors pick shares tied to long-term growth trends. The downside is probably less diversification and arguably therefore more risk.

What themes could do well in 2021?

There are many themes an investor could choose from. The ones that excite me the most, and from which I think I could pick winners, are clean energy, artificial intelligence, and e-commerce. All three will experience some disruption and ups and downs. However, the long-term multi-decade potential growth is there for all three themes. They are already established and also have a long runway of growth ahead.

The challenge with thematic investing is to still pick the best companies involved. Stock picking is still very important. Also, most innovations and themes experience ups and downs and setbacks, so the ride can be bumpy. To lessen the risk of picking theme-based stocks that don’t deliver as expected I might also invest in thematic funds. Then I’ll have a wider pool of investments and less exposure to any one technology or company. 

Getting into a winning theme as early as possible can deliver both short- and long-term results. Investing thematically is not the only way to invest and I’ll use it cautiously as a structure for choosing my investments. That said, I want at least part of my portfolio to be directly exposed to the growth of clean energy, artificial intelligence, and e-commerce.