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Beware the losers among thematic fund winners

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Thematically focused funds have been the big winners in fund flows in the past three years, but most themes have turned out to be fads, new research shows.

According to Morningstar’s latest ‘Global Thematic Funds Landscape Report’, over the three years through March 2021, collective assets under management in the 1,349 thematic funds more than tripled to US$595 billion (A$770 billion) from US$174 billion (A$225 billion) worldwide.

In Australia, locally domiciled thematic funds totalled A$2.6 billion as of March, up 160 per cent from a year earlier thanks to new launches. There are now 29 thematic funds domiciled in Australia, of which seven new thematic funds came to the market in first-quarter 2021 alone.

The BetaShares Global Cybersecurity ETF (ASX: HACK) is the largest thematic fund with A$415 million under management, the Morningstar report says.

Wing Chan, Morningstar’s director of manager research practice for Asia and EMEA, said thematic funds had been among the big winners to emerge from the global pandemic, with many posting “eye-catching returns” over the period.

“In the Asia-Pacific region, investors have been attracted to technology-themed products, with the popularity of the ARK ETFs a case in point,” he said. ARK Invest was founded by Catherine Wood, the chief executive and CIO, in 2014 to focus solely on disruptive innovation, primarily in the public equity markets.

A prime differentiator with other tech-focused managers is that ARK uses open-sourced research, becoming a “sharing economy company” in the asset management space. Its product range consists of actively managed ETFs. It had about US$50 billion (A$65 billion) under management in February this year.

Chan said that, in addition to technology, funds sporting ESG-related themes, such as electric vehicles and renewable energy, also enjoyed great success in the past three years.

However, he sounded a note of caution. He said: “When it comes to investing in thematic funds, it is important for investors to understand if a theme is a valid strategy for the long-term, or it’s just a short-term fad.

“Our analysis suggests that the odds of picking a thematic fund that survives and outperforms global equities over longer periods are firmly stacked against them.”

Chan said that thematic funds might be considered as “single-stock substitutes” for investors looking to express a view on a theme but lacking the resources or confidence to make individual stock picks.

The new Australian-domiciled thematic funds launched in the March quarter, according to the report, are:

  • BetaShares Climate Change Innovation ETF (ASX: ERTH)

  • VanEck Vectors Global Clean Energy ETF (ASX: CLNE)

  • NT World Green Transition Index Fund (in $A)

  • NT World Green Transition Index Fund (in $NZ)

  • Lazard Global Digital Health Fund

  • BetaShares Cloud Computing ETF (ASX: CLDD), and

  • Orca Global Disruption Fund (ASX: EGD).

Global highlights from the report include:

  • The rise in thematic funds in the three years means they now make up about 2.1 per cent of all assets invested in equity funds globally, up from 0.6 per cent ten years ago.

  • A record 237 new thematic funds debuted globally in 2020, up from 167 in 2019. As of the end of March 2021, there were 1,349 surviving funds in Morningstar’s global database that fit its definition of thematic. Funds tracking ‘energy transition’ themes, with US$74 billion ($96.1 billion)  in combined assets, represent the most popular thematic grouping globally.

  • Net inflows throughout the global pandemic have been particularly noteworthy. Over the trailing year to March, global net inflows equalled US$207 billion (A$268 billion), a figure that dwarfs the collective inflows of US$127 billion (A$164 billion) for the preceding nine years. Funds tracking technology themes secured the largest share of flows over the past 12 months, at which point they held half of assets in thematic funds globally.

  • Europe-focused thematic specialist Pictet Asset Management remains the largest thematic fund provider globally, with assets under management of US$55.6 billion (A$72 billion). The success of ARK Invest’s small range of actively managed ETFs has elevated the firm to near the summit of the global thematic provider leader board.

  • More than two-thirds of thematic funds globally survived and outperformed global equity markets (as proxied by the Morningstar global markets index) in the year to March. However, this success rate drops to just 22 per cent of thematic funds when you look at the trailing 15-year period, and 57 per cent of the thematic funds were closed during the period. “This lacklustre long-term performance can be partly explained by the fact that thematic funds’ fees tend to be higher than those levied by their non-thematic counterparts,” Morningstar says.

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