Thematic strategies need to be underpinned by a sound understanding of the impact of long-term political, economic, and social trends if they are to be successful, according to Cerulli Associates.

A long-term focus is key to successful thematic investing, says Cerulli Associates.

The financial research firm looked at the factors that shape a successful thematic investment strategy as well as potential risks along the way.

It found that being able to distinguish between long-term secular trends and short-term hype is vital to success.

In addition, product providers and their investors need to be in for the long haul with sufficient patience to enable investment theses to play out.

André Schnurrenberger, Managing Director, Europe, at Cerulli, notes, “Thematic investment is not a short-term win. Once the themes have been uncovered, and the companies that will benefit, disrupt, or lead the way have been identified, patience is needed.”

Investors should also note that there is heightened risk with a thematic approach. By construction, thematic ETFs tend to invest in smaller stocks and consequently have consistently exhibited higher volatility than their broad-market counterparts.

What is more, some strategies have shown persistent factor tilts. For example, technology-themed ETFs have favoured growth and momentum stocks.

Schnurrenberger adds, “The portfolio construction does not focus on past winners and therefore does not tend to feature benchmark heavyweights. It takes time for the themes to play out while avoiding the distraction of short-term market noise and performance pressures.

“The reward is a benchmark agnostic, high-conviction investment portfolio, focused on those businesses that will dominate their field in the 2020s and beyond.”