Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Mutual Funds

Thematic Funds Are Hot. But Should You Recommend Them?

Your article was successfully shared with the contacts you provided.

Thematic funds may have grown dramatically in the past three years, to $195 billion in assets under management worldwide vs. $75 billion three years ago, but they’re still only 1% of total global equity fund assets, states Morningstar in a new study on these products.

Though 154 new thematic funds were launched in 2019 (down from 169 in 2018), there are only 923 of these funds in the Morningstar global database, according to the Global Thematic Funds Landscape report by Morningstar Director of Global ETF Research Ben Johnson, senior analyst Kenneth Lamont and analyst Daniel Sotiroff.

Of thematic funds launched prior to 2010, less than half still exist, while of the funds launched prior to 2015, 69% have survived. Only in four outperformed the MSCI World Index over that 10-year period.

And globally, fees are higher than non-thematic counterparts.

So exactly why have they exploded in growth, at least overseas?

“This is a space that is very cyclical,” Johnson told ThinkAdvisor. “The growth tends to coincide with bull markets, so it’s not surprising that over the course the past five years, we’ve seen pretty significant growth given in large part because the market’s been very favorable.”

Defining Thematic Funds

The report defines thematic funds as those that “attempt to harness secular growth themes ranging from artificial intelligence to cannabis.” These funds are very focused, so sustainable funds may be included, such as those that capitalize on a transition to a low-carbon economy. However, those funds that are broader in scope, such as overall environmental, social and governance funds, are not.

Morningstar has broken the funds into four broad themes: Technology, physical world, social, and broad thematic, which then include specific areas. For example, social includes consumer, demographics, security, wellness and politics. The demographic area, in turn, contains funds that focus on population aging and other demographic trends.

Where’s the Interest?

Thematic funds domiciled in Europe have the greatest share of the market, with 54% of assets, up from 2% in 2000. In contrast, the share of assets in funds domiciled in North America decreased to 16% from 28% over the same period (although in the last trailing five years all areas had had inflows).

Most of these funds are actively managed; however, in North America, 80% of the funds are passively managed, largely due to the success of ETFs, according to Johnson. The active management is one reason fees are higher, at least overseas. Further, each fund is different in its scope, Johnson says. “When you frame fees against those large performance differences, they don’t feel as egregious. It’s not a commoditized product like the next S&P 500 ETF.”

Technology thematic funds have the highest amount of assets, with $97.3 billion at the end of 2019. Within technology, robotics and automation have the largest share, with $27 billion in assets in that group.

Johnson adds that these thematic funds also can “spice up” some portfolios that have needed a boost, or provide “conversational alpha” in which the advisor knows a client might be interested in certain topics, such as robotics or cannabis.

He adds that the median level of assets in these funds is $37 million. “That’s low,” Johnson says. “[We believe] anything with less than $100 million is [at] risk of potential closure.” Further, it may be difficult for providers “to keep the lights on,” especially as themes fall out of favor.

“People run to where they think they find gold,” he says. “This is a category of funds that appeals to some very basic instinct that many of us have. [But] we would urge people to think twice before buying a shovel and a pickax and heading for the hills.”

Therefore, advisors should do their homework before striking out. “Investors should be cautious, because when these funds liquidate, it could have tax implications for them to the extent that their position in the fund is appreciated,” Johnson says. “There could be costs involved. And certainly the one thing that all investors affected by a fund liquidation will have to do is figure out what they’re going to do with that money.”

— Related on ThinkAdvisor:


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.