Thematic funds have grown significantly in size, number, and prominence globally over the past five years. Despite recent underperformance, these funds seem to maintain a lasting role in investors’ portfolios. Higher costs, greater volatility, and the slim odds of success do not deter investors from chasing popular investment trends.
Thematic funds offer investors the opportunity to capitalise on emerging megatrends and structural growth themes such as artificial intelligence, ageing populations, and alternative energy. Over the past five years, fund houses have substantially expanded the offering of these niche and often gimmicky funds. The number of thematic funds has more than doubled globally since 2020, reaching 2,776 by the end of June 2024. Despite years of disappointing returns, their appeal remains strong, with global assets under management in thematic funds nearly doubling to 562 billion dollar over the five years to June 2024.
Europe takes the lead
Europe is the largest market for thematic funds. As of 30 June 2024, there were 870 thematic funds domiciled in the region, accounting for half of the global assets in thematic funds, compared to 22 percent for US-based funds. While assets in European thematic funds have more than doubled over the past five years to 280 billion dollar, the growth has not been linear.
The post-pandemic bull market was particularly favourable for thematic funds, which were among the top performers at the time. From the market trough in March 2020 to the peak at the end of 2021, assets in European thematic funds tripled to a record 477 billion dollar, supported by 215 billion dollar in net inflows.
However, during the subsequent “growth correction”, these funds were among the hardest hit. Since the end of 2021, assets under management in European thematic funds have dropped by over 40 percent as of June 2024. Net outflows during this period amounted to 41 billion dollar, with the energy transition theme offsetting technology-related outflows.
Following the boom years of 2021-22, the number of new thematic fund launches in Europe has decreased, while fund closures have risen. Nevertheless, new launches still outnumber closures, indicating continued optimism among fund providers. This aligns with historical patterns, where thematic funds are predominantly launched during bull markets. For instance, the number of new thematic funds closely correlated with broader market performance, peaking just before both the dot-com bubble and the global financial crisis.
Active management
Multi-theme funds remain the most popular thematic category in Europe, with 54 billion dollar in assets under management. Funds focusing on individual themes such as energy transition, resource management, and artificial intelligence & big data also feature prominently on European investors’ radars. A notable regional difference is the preference for actively managed funds over index strategies. In Europe, 86 percent of thematic fund assets are in actively managed funds, compared to 81 percent of US thematic fund assets being in index strategies.
Disappointing performance
While thematic funds have occasionally delivered exceptional performance, their long-term returns remain underwhelming. As much as 68 percent of thematic funds that existed in Europe in mid-2009 had closed by mid-2024. This high attrition rate significantly reduces the likelihood of investors picking a successful fund. Only 5 percent of thematic funds survived and outperformed the global equity index over this period.
The relatively high costs of thematic funds are a key obstacle, contributing to consistently low success rates. The data paints a bleak picture for investors, suggesting that the odds of selecting a thematic fund that both survives and outperforms global equities in the long term are exceedingly slim. However, some interesting thematic funds can still be identified.
Pictet-Global megatrend selection
Strategies highlighted on Morningstar’s radar are assessed either by qualitative analysis or through an algorithm-based evaluation, using the same framework as the analysts. Pictet-Global Megatrend Selection, with over 12 billion dollar in assets under management, is the largest thematic fund in Europe and is currently in the spotlight. The fund earns an Above Average rating for both People and Process, resulting in a Morningstar Medalist Rating of Bronze for its I EUR share class.
Pictet’s thematic strategies are led by Hans Peter Portner, a seasoned thematic investor, alongside a team of more than 50 portfolio managers. This team oversees 17 thematic strategies, each typically managed by three to four team members. Despite team changes in 2018 and 2023, the broader group has remained stable.
Since the launch of this broad thematic fund in 2008, its strategies have evolved to reflect new themes and repositioning. As of February 2024, the fund invests equally across 12 thematic strategies: biotech, clean energy transition, digital, health, human, nutrition, premium brands, robotics, security, smart city, timber, and water. These strategies follow a uniform bottom-up approach, ensuring in-depth research and consistency.
A key feature of the fund is diversification. It invests in individual stocks from the concentrated portfolios of its thematic strategies, with minimal overlap. Compared to its benchmark, the Morningstar Global All Cap TME Index, the fund stands out for its sector allocation (underweight in energy and financials), growth orientation, smaller exposure to megacaps, and a focus on European equities over emerging markets.
These characteristics influence the fund’s relative performance. For instance, the fund underperformed the benchmark significantly in 2021 and 2022, putting pressure on long-term returns. However, it rebounded strongly in 2023, matching the benchmark despite the dominance of US growth stocks, in which the fund has little to no exposure.
Jeffrey Schumacher is Director of Manager Research at Morningstar Benelux. Morningstar analyses and rates investment funds based on quantitative and qualitative research. Morningstar is part of the Investment Office expert panel.