More than half (54%) of the money flowing into global thematic funds comes from European investors, as assets under management have tripled to $195bn (€178bn) wordwide over the past three years.
In Europe, positive quarterly net inflows into thematic funds has risen to $43bn in three years, while assets under management tripled to $105bn (see chart below).
This is one of the key findings of Morningstar’s latest report on thematic fund trends. It included, in its review, active and passive equity funds but excluded fixed-income.
With over $27bn in assets, robotics and automation is the most popular theme, globally.
Resource management funds, including largely water-focused strategies, rank almost equally high, with $25bn in assets under management (see chart below).
In an interesting twist, however, the global push into Fintech does not appear to be attracting much attention, at least in terms of flows.
Overall low performance
Yet, Morningstar cautions investors to allocate strategically in these funds to harness returns, after its analysis had revealed their weak results.
Just 45% of all thematic funds launched prior to the year 2010 survived to 2020.
Outperformance of these funds has been meagre, with only one in four beating the MSCI World Index over this 10-year span.
The long-term performance figures suggest that “investors’ odds of selecting a fund that will survive and outperform over the long run are slim”, Morningstar said.
Low performance is partly due to higher fund fees of thematic funds compared to their non-thematic counterparts.
This can be seen when looking at both active and passive European thematic and non-thematic funds (see chart below).
It can be challenging to select the ‘right’ thematic fund that is able to outperform.
“While at face value the theme in question may be intuitive and appear to have durable investment merit, it might not be possible to capitalise on it via publicly traded stocks. This is because there are often few firms that represent pure plays on any given theme,” the report explains.
Meanwhile, “those that do win, can win big”, it states, and cites ARK Next Generation Internet ETF, an actively-managed exchange traded fund which delivered annualised returns of 27% from 2015 to 2019 – three times the return of the MSCI World Index over the same period.
One of the benefits of thematic funds can be their ability to reduce portfolio risk, eg if used as part of a diversification strategy.
“Because of their narrow exposure and higher risk profile, thematic funds are best used to complement rather than replace existing core holdings,” Morningstar notes.
It adds that the best themes are expected to play out over many years.
But the report warns that, “ultimately, the risk and return drivers should be well-understood before any attempt is made to blend them into a broader portfolio”.