Allocating to Thematic Investments

Abstract

In this paper we introduce the notion of themes as an additional investment dimension beyond asset classes, regions, sectors and styles, and we propose a framework to allocate to thematic investments at a strategic asset allocation level. The goal of thematic investments is to provide the means to invest in assets that have their returns significantly impacted by the structural changes underlying the theme. Such changes come about through megatrends that shape societies: Demographic shifts, social or attitudinal changes, environmental impact, resource scarcity, economic imbalances, transfer of power, technological advances and regulatory or political changes. Allocating to themes requires discipline because thematic investments are not only exposed to the theme but also to the traditional risk factors. Our approach to allocating to thematic investments uses a framework based on robust portfolio optimisation, which takes into account the expected excess return derived from the exposure to the theme as well as exposures to traditional risk factors. As an illustration, we provide an example where thematic investments in energy transition, environmental sustainability, healthcare innovation, consumer innovation and disruptive tech are added to a traditional multi-asset portfolio.