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Thematics: An essential resource for investors
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Thematics: An essential resource for investors
In a post-pandemic world with growing market volatility and innovative new approaches to investing, thematic investing has seen a surge in demand.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Thematic investing is on the rise. In an increasingly globalised world where industries and supply chains are being disrupted through geopolitics, digitalisation and sustainability, investing in a focussed pool of stocks that echo the beliefs of investors is rising in popularity.

Omar Moufti, lead strategist on thematics for iShares EMEA, explores the appeal of thematic investing in exchange traded funds (ETFs) and how the asset manager’s products straddle the line between active investing and indexing.

What differentiates thematic ETFs from standard-listed indices is that they are composed of a targeted selection of stocks not constrained by sector or region – they are selected by theme.

According to Moufti, one of the challenges in thematic investing is in establishing investible themes when there are an infinite number to select from. To address this, BlackRock has defined five global disruptive forces that are structurally changing the world and conducts extensive research into how to express and invest in the opportunities that arise from them.

"These megatrends look towards long-term structural change and investing in their effects requires a very different method to that used to construct traditional indexes. It's about where the world is heading and researching where we think there is an attractive opportunity set for the long term."
Omar Moufti Lead strategist on thematics, iShares EMEA

Structural & Value Opportunity

In recent years thematics have been one of the fastest-growing segments in the world of equities. Moufti highlights that the pandemic accelerated a lot of digitalisation and healthcare-related trends: “I think the pandemic has been a good acid test for thematics since you had an event which brought forward some future trends. We saw the sustainable themes as being particularly resilient in this environment, due to the long-term structural growth drivers behind the companies the team invests in.  This was a big boost to the growth of the industry.”

An immediate trend that looks to impact demand for thematic investing is inflation. While thematics are focused on gaining exposure to structural growth, they can also have value factor exposure. And in the case of rising inflation, commodity-linked themes have seen strong returns.

Moufti explains that one of the thematic sub-theme in their essential resources range has seen a sharp rise in returns. The S&P Commodity Producers Agribusiness Index which is used as a benchmark - focuses on structural growth as it addresses the need for the world to produce more food with the same, limited resources, but in doing so, the fund has also benefited from rising commodity prices.

He says: “Agricultural commodity prices have spent the last 10 years in decline. That's why agribusiness has this value exposure to it. Last year this trend started to reverse, and has taken on more momentum this year with the geopolitical events that we've seen.”

The strong performance of certain themes in a globally volatile market illustrates the diversification potential of thematic investing. Moufti highlights that the themes agribusiness, timber and clean energy have performed comparatively well and their underlying stocks share little overlap with global benchmarks.

This can allow thematics to be used to balance exposures in traditional indexes or other thematic funds.

Index performance, last 10 calendar years: S&P Commodity Producers Agribusiness USD net return
Source: S&P Dow Jones Indices. Data as of June 30, 2022. Chart is provided for illustrative purposes only. The figures shown relate to past performance. Past performance is not a reliable indicator of current or future results.

Active-like approach

One of the traditional barriers to thematic investing has been the additional cost associated with hand-picking stocks on an active-management basis, but this is changing. As datasets improve, and as companies disclose more data, asset managers have the freedom to develop solutions to bridge the gap between active investing and indexing approaches.

While iShares’ thematic range does not hand-pick specific stocks to invest in, systematic methodologies have been developed to find companies that are exposed to given themes. Moufti highlights that the end exposures are very similar to active funds despite blending features associated with indexing.

Another benefit to the growth of thematic investing is its accessibility. Investing presents a plethora of options across sectors, and with sustainability concerns, it can become daunting to understand how investments relate to the real world. Thematic ETFs are accessible to investors, with the perceived market opportunity being clear and upfront. In the case of iShares’ funds, the themes are also intrinsically linked to many of the UN Sustainable Development Goals.

Moufti explains that the products are particularly good at providing stories which clients can easily understand and invest in but reduce stock-specific risk by offering a diversified index product.

He concludes: “If underlying investors can access it easier, can understand the opportunity better, then they're more likely to stay invested for the long term. Ultimately for everyone's retirement, that is the most important thing.”

To learn more about thematics ETFs, search "iShares thematics".

Risk Warnings

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Important Information

This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons.

This is Issued by BlackRock Advisors (UK) Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Registered in England and Wales No. 00796793. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

The Commodity Producers Agribusiness Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by iShares.  S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by iShares.  iShares ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.

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