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Thematic funds warning

It is important for investors to understand if a theme is a valid strategy for the long-term or just a short-term fad, according to a Morningstar report.

“Thematic funds have been hugely popular among fund investors in Asia, with technology related themes such as robotics, artificial intelligence and big data gaining plenty of interest in recent years,” said Wing Chan, Morningstar’s director of manager research practice for Emea and Asia, in a statement.

The collective AUM in thematic funds worldwide nearly tripled to about $195bn from $75bn during the three years to 31 December 2019, representing 1% of total global equity fund assets. There were 154 new thematic funds launched last year, bringing the total to 923, according to the firm’s “Global Thematic Funds Landscape Report”, released this week.

“Some of these products were driven by genuinely long-term themes that are expected to play out over many years, but at the same time, the inability for traditional active equity funds to outperform, and the growing market share of low-cost passive options has also prompted many asset managers to launch products that appear to be ‘differentiated’,” Chan told FSA.

However, the long-term performance figures for thematic funds in general are unflattering, and investors tend to switch out of funds when the themes are not in favour, resulting in high turnover, he added.

Only 45% of all thematic funds launched before 2010 survived a decade later, and of those that survived, just a quarter outperformed the MSCI World Index over that 10-year span, according to Morningstar data.

A major reason for their relatively poor performance are their high fees, which, compounded over time, severely hurt fund returns.

“Many thematic funds were sold on the premise that they provide specific exposure that is otherwise difficult to obtain via passive options.  One thing is clear, however – there is no real justification for a thematic fund to charge a higher fee than an equivalent equity fund,” said Chan.

In addition to fees, the inability to pick the right theme or simply poor stock selection could have contributed to fund underperformance.

“On the other hand, the best themes are expected to play out over many years, [so] they are most suitably deployed over longer investment horizons,” said Chan.

Thematic classifications

The report introduces a taxonomy for classifying thematic equity funds (both active and passive), and identifies the major trends that have emerged in recent years. It excludes other asset classes, notably fixed-income funds, because their investment profile is less suited to capturing the growth potential of emerging themes, according to the report’s authors.

The framework arranges the thematic universe into four main categories: technology, physical world, social and broad thematics, which are broken down into 23 sub-categories, which are further divided into around 160 even more specific themes, ranging from 5G and water infrastructure to pets and marijuana.

Technology encompasses sub-categories such as fintech, robotics and connectivity; physical world includes funds that focus on issues such as resource management and energy transition; the social category covers industries related to health, security, demographics and the consumer; and finally, those funds that track multiple themes belonging to any of those three categories are grouped under the broad thematic umbrella.

The report found that technology is the most popular broad theme, attracting half of assets in thematic funds globally. With over $27bn in assets, “robotics and automation” is the most popular theme globally, while resource management funds, a grouping largely populated by water-focused strategies, takes second place, with $25bn  of AUM. Third place goes to funds with a connectivity theme, including products with “smart cities” and “internet of things” mandates.

In total, 68% of thematic funds globally have a growth bias, and this number rises to over 75% for technology-themed funds. Only 9% of all thematic funds have an explicit value tilt, with 93% of assets in value-leaning thematic funds sitting in funds grouped into the physical world broad theme.

Tech tilt in Asia

Although the report mainly focuses on Europe and North America, it noted that five of the largest thematic funds authorised for sale to Hong Kong and Singapore retail investors are managed by Pictet Asset Management, which also dominates the thematic space in Europe.

The largest, the $9.4bn Pictet Global Megatrend, has generated a three-year cumulative return of 39.81%, according to FE Fundinfo, but has underperformed the MSCI World index (40.43%), which Morningstar uses as proxy benchmark for assessing relative returns of the thematic funds in general.

However, the Swiss asset manager’s more narrowly defined thematic funds have posted superior returns, especially the $.5.7bn Pictet Robotics Fund, which has achieved a 62.44% cumulative return during the same period, albeit with 17.14% annualised volatility – much higher than the 11.58% volatility of the MSCI World index.

Last October, Pictet product specialists spent two weeks in Asia promoting its so-called disruptive technology funds, including the robotics, security and digital funds.

“The most popular types of thematic funds bought by Hong Kong and Singapore investors are similar to those popular in Europe, such as robotics, automation, big data and cybersecurity,” said Chan.

Nevertheless, assets in thematic funds actually domiciled in Asia have also been rising.

There are now 20 active and passive thematic funds domiciled in Hong Kong or Singapore, according to Morningstar data. These include four products managed by Mirae, three by UOB, two each by Deutsche and Premia Partners and one fund each managed by Allianz GI, BEA Union, China AMC, EFG and Nikko.

In Japan, more than 95% of assets in Japan-domiciled thematic funds are invested in technology themes, with products tracking robotics and automation, connectivity, and artificial intelligence themes particularly popular, according to the report.

In China, political themes such as “structural reform” are the most popular among Chinese investors, and funds in this group held over $6bn in assets at the end of 2019, it noted.

Returns of largest cross-border thematic funds for sale in Hong Kong/Singapore



AUM ($)

3-year cumulative return 3-year annualised return 3-year annualised volatility

Sharpe Ratio

Pictet Robotics


62.44% 17.67% 17.14%


Pictet Digital


52.71% 15.08% 14.42%


Pictet Security


51.43% 14.81% 13.14%


Fidelity China Consumer


42.11% 12.48% 19.05%


Pictet Water


40.32% 12.13% 11.20%


Pictet Global Megatrend


39.81% 11.93% 12.35%


MSCI World Index

40.43% 12.00% 11.58%


Source: Morningstar; FE Fundinfo (Data in US dollars, 25 February 2017 – 21 February 2020)

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