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Passing fad or promising future: What’s the role of thematic funds in wider portfolios?

Passing fad or promising future: What’s the role of thematic funds in wider portfolios?

Will thematic funds become a building block in asset allocation or will they continue to be alpha generating satellites? We gathered five investment professionals to find out.

 The panel was comprised of: 

  • Karen Kharmandarian, chairman and partner, Thematic Asset Management (a Natixis Investment Managers affiliate)
  • Carlo Sturlese, fund analyst, Kairos Partners SGR
  • Timo Männer, senior fund analyst, Credit Suisse AG
  • Mikaël Safrana, director, Banque Heritage
  • Paul Weber, head of fund research & manager selection, Amundi Asset Management
  • Chris Sloley, editor, Citywire Selector

Chris Sloley: How has the thematic story developed over time?

Timo Männer: Back in the 1980s and 90s, there were only a few sector strategies. Things like telecom or healthcare, which are booming now, were not very much in the focus of investors. In the past three to five years, however, we have seen a significant growth in thematics, not only in terms of assets under management but also when it comes to the number of strategies launched.

Paul Weber: In my opinion, the first thematic funds were effectively sector or sub-sector strategies, which didn’t attract a lot of attention. Many firms with a full range of sector funds have either closed them off, merged them into a global thematic of a global strategy or, alternatively, transformed them into thematic funds. Healthcare, technology, infrastructure and real estate are certainly legacy sector funds that still get traction with investors, while, more recently, themes like smart cities or disruption have come to the fore.

I think the reason why these themes and strategies have become so successful in wholesale retail channels goes back to their tangible nature. You can empathise with the growth of technology and acknowledge it in your day-to-day life. At the same time though, I haven’t seen much adoption of these themes by institutional investors, which demonstrates an interesting divergence.

Chris Sloley: Mikaël, what is your view on the crossover between wholesale and institutional?

Mikaël Safrana: I fully agree with Paul. Due to the nature of thematics, clients can relate to them and it is an easy story to tell, which makes them great advisory products. It is much easier to explain a golden age, cloud computing or fintech theme to a client instead of confronting them with terms like PE, PS and all that kind of lingo. You have to keep in mind that not everyone has the same financial savviness.

I think one of the reasons why thematics haven’t made it into institutional portfolios or - at least in our case - discretionary management is because a lot of these products have a tendency to play the same names and you have to be careful about that. For example, they might be holding direct positions in stocks that are already forming a large part of the indices we use in our ETFs.

Carlo Sturlese: I agree that thematic products are more appealing to retail than institutional clients. The challenge we find is that thematics, more often than not, are following a fad. That makes valuations difficult. If you take a closer look at the product, you may end up buying very good, high-quality stock - but for the wrong price. So, why bother if it’s just for a marketing pitch? Yet, that’s what clients want.

Chris Sloley: Karen, how do you think thematics have developed over time?

Karen Kharmandarian: Historically, thematics have definitely been more readily accepted by retail investors. Now, however, we are also seeing increasing interest from the wholesale and institutional markets.

That said, we need to be clear on what a thematic product actually is. It is not a factor fund, so you really have to think about the value chain of a theme. To master the portfolio throughout the market cycle, you need to make sure that you are exposed to different verticals and drivers. Valuations and the ability to be more defensive or aggressive, depending on the market condition, are key.

The attractiveness of a thematic fund is based on its unconstrained approach, which is agnostic to traditional classifications. This has become even more important in times of globalisation. Gradually, investors have come to realise that the traditional ways of global equity investing have become less relevant.

Chris Sloley: What are the risks of thematic funds?

Carlo Sturlese: Sometimes, you meet managers that offer you the sexiest strategies in the world, but when you step out of the meeting, you scratch your head and think “Hold on, how is this guy supposed to make money with these scenarios?” We think that unreasonable performance structures and downsides frequently tend to get overlooked.

For us, things need to be simple. We are not interested in funky stuff like exotic option strategies. Instead, we go for plain vanilla, either long-only or long-short, low leverage strategies. We don’t want to wake up in the morning and discover that a fund has blown up on us. The challenge lies in striking the right balance between finding something that the client wants and something that makes sense from an investment point of view in terms of risk reward.

Timo Männer: Thematic funds definitely come with additional work. When new thematic topics are launched, they usually don’t have a respective dedicated benchmark, so you have to check with every manager what kind of universe they are giving themselves in terms of underlying stocks.

You also need to assess if the portfolio can perform over a sustained period of time or if it is too narrow to be considered as a thematic strategy. Even more important from my point of view is to constantly check the fund’s performance relative to its defined universe and not just a plain vanilla benchmark. This is not the work you do in a plain vanilla US equity large-cap blend peer, it is really different.

Karen Kharmandarian: I think we are lacking a standardisation of strategies, which makes it difficult to compare different funds. For example, when I look at my space - AI and robotics - and I compare my fund with peers, they have included companies that are not part of my universe at all. My definition of AI and robotics is really different from others.

Chris Sloley: What shape will thematic investing take in future portfolios?

Paul Weber: I think the crux lies in strong portfolio construction and robust solutions. We are seeing a lot of demand from our private bank, retail bank, and financial adviser clients and have created a range of largely equity-biased strategies for them - thematic fund of funds that combine ideas from a growth and an opportunity perspective.

Timo Männer: Thematics will take on a more important role in asset allocation. I also think that millennials have an impact on the growing significance of thematic funds in the future. They like to adapt themes and welcome ESG and climate change strategies in their portfolios. Asset managers will adapt to that development by implementing more thematic strategies into their overall strategic framework.

Mikaël Safrana: I think as reluctant as I might have sounded when it comes to implementing thematic funds within discretionary management and our whole asset allocation, this is something we are going to have to do.

You have to keep in mind though that the amount of monitoring and due diligence that goes into a thematic fund might be a lot higher than it would be for a traditional equity fund. You need to make sure that managers stick to their definition of the theme and find a way to compare different thematic funds with each other.

Chris Sloley: Karen, what is your outlook for thematics?

Karen Kharmandarian: We see a nascent trend for actively managed multi-thematic strategies that provide a broader exposure to different verticals, sectors and regions. The last weeks have also shown that multiyear, multidecade trends - secular growth trends - are picking up speed and will become even more relevant in the future.

This material is for informational purposes only and should not be construed as investment advice. Any economic projections or forecasts contained herein reflect subjective judgments and assumptions, and unexpected events may occur. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed are as of May 14, 2020 and may change based on market and other conditions.

Please read the prospectus and Key Investor Information carefully before investing. If the fund is registered in your jurisdiction, these documents are available free of charge from the Natixis Investment Managers offices (im.natixis.com).

In Latin America: Provided to Professional Clients for information purposes only by Natixis Investment Managers S.A. Natixis Investment Managers S.A. is a Luxembourg management company that is authorized by the Commission de Surveillance du Secteur Financier and is incorporated under Luxembourg laws and registered under n. B 115843. Registered office of Natixis Investment Managers S.A.: 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg. In Colombia: Provided by Natixis Investment Managers S.A. Oficina de Representación (Colombia) to professional clients for informational purposes only as permitted under Decree 2555 of 2010. Any products, services or investments referred to herein are rendered exclusively outside of Colombia. In Mexico: Provided by Natixis IM Mexico, S. de R.L. de C.V., which is not a regulated financial entity, securities intermediary, or an investment manager in terms of the Mexican Securities Market Law (Ley del Mercado de Valores) and is not registered with the Comisión Nacional Bancaria y de Valores (CNBV) or any other Mexican authority. Any products, services or investments referred to herein that require authorization or license are rendered exclusively outside of Mexico. While shares of certain ETFs may be listed in the Sistema Internacional de Cotizaciones (SIC), such listing does not represent a public offering of securities in Mexico, and therefore the accuracy of this information has not been confirmed by the CNBV. Natixis Investment Managers is an entity organized under the laws of France and is not authorized by or registered with the CNBV or any otherMexican authority. Any reference contained herein to “Investment Managers” is made to Natixis InvestmentManagers and/or any of its investment management subsidiaries, which are also not authorized by or registered with the CNBV or any other Mexican authority. In Uruguay: Provided by Natixis Investment Managers Uruguay S.A., a duly registered investment advisor, authorised and supervised by the Central Bank of Uruguay. Office: San Lucar 1491, Montevideo, Uruguay, CP 11500.

The above referenced entities are business development units of Natixis Investment Managers, the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. The investment management subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorised. Their services and the products they manage are not available to all investors in all jurisdictions.

In the United States: Provided by Natixis Distribution, L.P., 888 Boylston St., Boston, MA 02199 for U.S. financial advisors who do business with investors who are not U.S. Persons (as that term is used in Regulation S under the Securities Act of 1933) or persons otherwise present in the U.S. It may not be redistributed to U.S. Persons or persons present in the U.S. Natixis Investment Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, L.P. and Natixis Investment Managers S.A.

This document may contain references to copyrights, indexes and trademarks that may not be registered in all jurisdictions. Third party registrations are the property of their respective owners and are not affiliated with Natixis Investment Managers or any of its related or affiliated companies (collectively “Natixis”). Such third party owners do not sponsor, endorse or participate in the provision of any Natixis services, funds or other financial products.

The index information contained herein is derived from third parties and is provided on an “as is” basis. The user of this information assumes the entire risk of use of this information. Each of the third party entities involved in compiling, computing or creating index information, disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to such information.

The provision of this material and/or reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of any regulated financial activity. Investors should consider the investment objectives, risks and expenses of any investment carefully before investing. The analyses, opinions, and certain of the investment themes and processes referenced herein represent the views of the portfolio manager(s) as of the date indicated. These, as well as the portfolio holdings and characteristics shown, are subject to change. There can be no assurance that developments will transpire as may be forecasted in this material. Although Natixis Investment Managers believes the information provided in this material to be reliable, including that from third party sources, it does not guarantee the accuracy, adequacy, or completeness of such information. May not be redistributed, published, or reproduced, in whole or in part. Amounts shown are expressed in USD unless otherwise indicated.

NATIXIS INVESTMENT MANAGERS RCS Paris 453 952 681 Capital: €178 251 690 43, Avenue Pierre Mendès-France, 75013 Paris www.im.natixis.com

NATIXIS INVESTMENT MANAGERS S.A. Luxembourg management company authorized by the Commission de Surveillance du Secteur Financier - under Luxembourg laws and registered under n. B 115843. Registered office : 2, rue Jean Monnet, L-2180 Luxembourg, Grand Duchy of Luxembourg.

THEMATICS ASSET MANAGEMENT A French SAS (Société par Actions Simplifiée) with a share capital of €150 000 - 843 939 992 RCS Paris - Regulated by the AMF (Autorité des Marchés Financiers), under no GP 19000027. 43, avenue Pierre Mendès France 75013 Paris

3119385.1.1
EXP. 12/01/2020

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