Thematic Funds Continue to Capture Investors' Imagination-and Money

Investors should think twice before chasing the next hot theme.

Kenneth Lamont 30 March, 2022 | 1:49AM
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Designed World

In recent years, the global menu of thematic funds has expanded in number and breadth like never before. These funds attempt to harness secular growth themes, such as technology themes like artificial intelligence, social themes like Generation Z, and physical world themes like renewable energy or climate change.

The result has been a steady supply of ever more niche and complex investment strategies from asset managers and increased demand from investors for greater clarity with respect to how these funds are built and how they might (or might not) fit within their portfolios.

At the end of December 2021, there were 1,952 surviving funds in Morningstar's global database that fit our definition of thematic. In the trailing three years to the end of 2021, these funds' assets under management grew nearly threefold to $806 billion from $255 billion worldwide. At the end of 2021, global thematic fund assets represented 2.7% of all assets invested in equity funds globally, up from 0.8% 10 years ago.

As assets have poured into thematic funds, the menu has broadened. A record 589 new thematic funds debuted globally in 2021, more than double the previous record of 271 funds launched in 2020.

We detail these findings in our latest Global Thematic Funds Landscape. Below, we explore some key findings from the report.

Exhibit 1

The Canadian Thematic Fund Market

Canadian thematic funds represent a tiny but growing segment of the Canadian fund universe. As of December 2021, the cohort held a little more than $2.6 billion of investors' money, up from just $405 million in December 2016. As seen in other regions, inflows started off strong in 2021, but they cooled down as performance went from being a tailwind to a headwind. Canadian thematic funds pulled in $755 million in the first quarter before quickly dropping to less than $200 million for each of the remaining three quarters of the year. Funds from the technology and physical world broad themes were among the most popular with investors in 2021, as measured by inflows. Overall, investors put a little more than $1.1 billion of new money into Canadian thematic funds over the course of 2021, more than twice the amount they invested in 2020.

Exhibit 2

Historically, thematic fund launches have tended to move in cycles. New strategies are often introduced during periods of strong performance, like the new millennium and the mid-2000s. But they tend to wane during downturns. Those trends indicate that investors' appetites for these strategies and the desire for providers to offer them typically move in sync with the broader market.

Thematic fund launches are a bull-market phenomenon. The hoard of new thematic funds introduced over the past several years further supports this connection. The second half of 2020 witnessed nearly as many launches as the entirety of 2019, and 2021 was another record year.

Fees are an important consideration for any investment strategy as they directly affect performance. Canadian thematic funds charge higher fees than their nonthematic counterparts. These higher fees have contributed to their relatively poor performance over longer periods, and their ability to outperform the global stock market tends to decline as strategies age. For example, about half of Canadian thematic funds survived and outperformed the Morningstar Global Markets Index over the trailing three years through December 2021. Their success rate drops to less than 20% over the prior five years. Exhibit 42 details the formidable challenges facing investors in selecting a thematic fund that will survive and outperform global equities over longer periods.

Exhibit 42

Chasing Shiny Objects

Thematic funds have captured investors' imagination, but buyers should beware. These funds are often designed more with salability in mind than investment suitability. Many cross the border into gimmick territory. Examples abound. Whiskey ETF, The Kids Fund, and Pure Play Internet are just a few that have come and gone over the years. Investors have often piled into these funds at precisely the wrong time, only to be disappointed. Investors mulling thematic ETFs should think long and hard about whether a particular theme has long-term investment merit or if it is a mirage.


For the analysis of thematic funds around the world, download our Global Thematic Funds Landscape.

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About Author

Kenneth Lamont  Kenneth Lamont  is a passive funds research analyst for Morningstar.

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