At Trust Point and its Emerj360 division, our goal is to help clients grow and protect their wealth through thoughtful, long-term strategies. One approach gaining attention in today’s rapidly changing world is thematic investing, an investment strategy focused on powerful, long-term trends shaping the global economy.
The appeal of this approach is clear. Thematic strategies allow investors to align their portfolios with structural shifts like digital transformation or clean energy. But as with any investment approach, long-term success depends on discipline, timing, and knowing where, or if, these themes belong in a diversified portfolio.
What is Thematic Investing?
Thematic investing focuses on forwardlooking opportunities rather than traditional sectors or regions. It identifies major shifts — like technological innovation, demographic trends, or environmental sustainability — and invests in companies positioned to benefit. For example, a digital transformation theme might include firms in cloud computing, cybersecurity, and semiconductors. While in different industries, they share a common structural trend. This approach lets investors align portfolios with long-term convictions, whether supporting innovation, promoting sustainability, or reflecting personal values.
How Investors Access Themes
Thematic strategies are typically accessed through exchange-traded funds (ETFs) or mutual funds, which group together companies tied to a specific trend. Some investors also take a more active approach, selecting individual stocks that align with a particular theme.
But successful thematic investing isn’t about following headlines or hype. It’s about identifying durable trends and investing in companies with the fundamentals to thrive over time.
Growth Doesn’t Always Equal Returns
It’s easy to assume that fast-growing industries will deliver strong returns. But history tells a more complex story.
Take solar energy: despite years of rapid growth and innovation, solar stocks have underperformed global equities by more than 90% over the past decade. Competitive pressures and capital-intensive business models have made profitability difficult to achieve, even as the sector continues to grow.
Now consider tobacco, a shrinking industry that, due to strict regulations and limited competition, became one of the best-performing sectors over the past 50 years.
Innovation matters, but profitability matters more. When evaluating a theme, investors should ask: Can companies within this trend generate lasting economic value, or will that value be competed away?
Long-Term Success Isn’t About Timing the Trend. It’s About Trusting the Plan.
The Timing Challenge
Another risk with thematic investing is poor timing. Research from the Chartered Financial Analyst (CFA) Institute shows that thematic funds often see inflows surge after periods of strong performance, only to underperform in the years that follow. Popularity can drive up prices, creating crowded trades and elevated valuations that are vulnerable to a pullback toward more typical levels.
This reflects a broader behavioral trap: performance chasing. Historically, portfolios built around the bestperforming industries of the prior three years have tended to lag broader market benchmarks.
How We Think About Themes
At Trust Point and Emerj360, we don’t build portfolios around trends alone. While themes can reflect meaningful structural change, they often carry concentrated risks, ranging from valuation extremes to limited diversification and mistimed entry points.
That’s why we approach thematic exposure through a more disciplined lens:
- Strategic Asset Allocation: We consider how long-term shifts, like aging populations, automation, or the energy transition, shape our decisions about which asset classes, sectors, and regions to invest in.
- Active Management: Many of the mutual funds we select are managed by professionals who integrate thematic insights while maintaining diversification and risk controls. These indirect exposures allow us to participate in long-term trends without sacrificing balance. Focusing on fundamentals, valuation, and durable growth, we aim to harness thematic opportunities.
Investing in What Endures
Thematic investing is a compelling way to engage with the future, but success requires more than trendspotting. It calls for discipline, research, and a focus on long-term fundamentals. We help clients navigate what’s next without losing sight of what lasts, building portfolios designed to endure cycles and capture opportunities beyond the headlines.
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By: Brandon Hellenbrand, CFA®, Senior Portfolio Manager, Trust Point
