Thematic investing: Tomorrow’s themes, today

The case for thematic investing

Thematic investing has become a compelling way for investors to align portfolios with the trends shaping the future. A spectrum of long-term and short-term themes are increasingly influencing which companies lead the way as economies grow and markets evolve. The top themes over the last four years capture nearly 25% of US equity market returns on average, a trend that’s accelerated since the emergence of COVID-19 in 2020.¹ This has led to a broad industry shift with assets managed in US-listed thematic funds growing over 10x from $13bn in 2016 to $148bn in 2021.²

Our research also indicates that themes have the potential to deliver differentiated alpha when used alongside other investment strategies. A hypothetical US thematic portfolio using a systematic approach demonstrates an average excess return correlation of -0.06 to the largest strategies in the U.S. Large Blend category and -0.02 to US factors.³ Delivering both return potential and portfolio diversification, thematic investing has risen in prominence as a way to build alpha-seeking portfolios.

Decoding investment themes

We think of themes as dynamic topics that are front-of-mind for investors, persist for some time, and have demonstrated an ability to drive equity market returns. Within BlackRock Systematic, we have developed a data-driven approach that seeks to identify, capture, and evaluate themes at scale.

A dynamic landscape
A broad range of structural and transitory themes drive markets at any given time. At one end of the spectrum, we have structural megatrends expected to shape the long-term trajectory of the economy like technological innovation, demographic shifts, and climate change. At the other end, we have evolving short-term trends driven by policy shifts, investor sentiment, and unforeseen developments—like a global pandemic, supply chain challenges, and inflationary pressures. Our systematic framework for thematic investing helps us to identify and reconcile both.

We can begin to understand how themes develop by assessing the attention that they receive using natural language processing (“NLP”) techniques. By nature, themes create a persistent flow of news as topics that investors are researching, corporate officers are addressing in conference calls, and the press if publishing. Leveraging this volume of textual sources, we can begin to quantify the flow of information dictating a theme’s relevance and life span.

Attention metrics that count mentions of themes in financial news can help to differentiate short-term and long-term trends

Our analysis reveals that some themes persist while others rapidly decay. In the chart above, structural themes such as artificial intelligence and medical technology demonstrate their endurance, where media coverage has perpetuated innovation and continued investment in the space. Transitory themes are equally observable in the data, garnering rapid attention during supportive macro environments but eventually declining.

To maximize return potential investing across both long-term and short-term themes, our research indicates that a systematic approach has the potential to effectively manage this spectrum through the application of data-driven insights.

Thematic + dynamic

Our alpha-seeking process uses data and scientific analysis to monitor how themes develop and interact in real time, incorporating massive (and rapidly expanding) troves of unstructured and alternative data to navigate the thematic landscape.

Identify & capture
A systematic approach to identifying and capturing investible themes begins with analyzing vast datasets to understand the current thematic landscape. We apply NLP techniques across over one million financial news articles each year and more than five thousand earnings call transcripts every quarter to link companies to these evolving trends or topics.

We turn unstructured textual information into meaningful relationships across stocks & themes

Our analytical capabilities help to identify a wide range of companies exposed to a theme—including more subtle linkages. Consider a theme like blockchain technology, for example. Our models first parse through baskets constructed by sell-side researchers and existing thematic funds, identifying direct exposures selected by brokers and portfolio managers. These may include firms such as cryptocurrency exchanges and bitcoin miners. Text-mining broader sets of unstructured data for associated keywords captures an expanded group including indirect, less observable connections. For example, we may discover online retailers accepting cryptocurrency or asset managers investing in the space. This robust process results in a diversified group of stocks spanning across the full scope of a theme.

Evaluate & rotate
Part of an alpha-seeking, systematic approach to thematic investing is the consistent and timely analysis of existing themes. Proprietary systematic signals produce dynamic, market-aware return forecasts that shape our current view of each theme. This tends to favor themes with increasing news flow and positive investor sentiment, with awareness of potential over-crowding and over-valuation. Shown below, each theme is given an overall rating using a combination of insights.

This aggregated “thematic view” is used to determine how we rotate themes within a portfolio, overweighting themes with greater conviction and underweighting those with a less supportive outlook—adapting as conditions change and opportunities arise. Using an optimization that incorporates forecasts for individual and interacting themes, we focus on risk management and maintaining a diversified approach alongside our aim of maximizing alpha potential. 

We evaluate and rank each theme daily using proprietary signals

Enhancing portfolios through themes

With nearly one-quarter of US equity market returns captured by the top themes over the last four years, it’s no surprise that thematic investing has garnered attention and investor flows.⁴ Our research indicates that a dynamic thematic strategy rooted in a systematic framework may enhance portfolio returns while complementing other investment strategies.

By transforming a wealth of data into valuable insights, investors can access diversified exposure to a spectrum of timely and transformational themes—making a systematic framework the future of thematic investing.