Will Almost Half Of Investment Portfolios Be Thematic In The Future?

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One of the greatest investors of our time, Kiril Sokoloff, shares what he expects to be at the forefront of the digital revolution, including disruptive technologies like 5G, AI and blockchain.

Thematic investing is one of the most popular investment methods of the 21st century and has been growing for a number of decades. Data from Morningstar showed that the amount of capital invested in thematic funds grew to $781bn at the end of 2021, compared with just $251bn two years earlier, an increase of around 186%.

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In an exclusive interview with Opto Sessions (part of derivatives broker CMC Markets), the founder of market research firm 13D Research & Strategy, Kiril Sokoloff, explains how a thematic investment strategy has helped him to anticipate some of the most significant trends in the financial markets of the past 40 years.

What Is 13D's Thematic Investment Strategy?

MSCI describes thematic investing as a “top-down approach that capitalises on opportunities created by macroeconomic, geopolitical and technological trends” and suggests that investors shouldn’t expect short-term swings but instead “long-term, structural and transformative shifts”.

When identifying emerging investment themes, Sokoloff believes that the smallest details can have an impact on the bigger picture. He aims to understand what the key drivers of a whole cycle are, as there is a large number of different factors, variables, countries and geopolitics.

He defines a theme as “investing in the solution to an economic problem. The economic problem isn’t going to go away, so it’s driven by the need to fix it”.

There are different approaches when it comes to thematic investing, including the following:

  1. Investing in companies directly associated with a theme. For example, if you took a bullish stance on the EV industry, you could invest in electric car manufacturers like Tesla Inc (NASDAQ:TSLA), Nio Inc (NYSE:NIO) and Lucid Group Inc (NASDAQ:LCID). The majority of people would typically go with this approach.
  2. Looking at the bigger picture and investing in related asset types. In a different approach, Sokoloff would prefer to analyse the commodities that stand to gain from the EV boom, and invest in major producers of lithium, copper and cobalt.

Sokoloff often holds a contrarian outlook to the general consensus, and this has helped him to predict some of the biggest trends and events in the financial world.

What Major Trends And Events Did Sokoloff Anticipate?

Below is a list of some of the most memorable events that Sokoloff either managed to accurately predict or make a profit from, according to CMC’s podcast and a 2020 interview with the Financial Times.

  • The commodities’ supercycle peak in 1978 and another bull market in 1999.
  • An inflationary blow off due to tax cuts and deregulation in the US in the early 1980s.
  • The industrialisation of China during a period where the Hang Seng rose from HK$3,000 in 1990 to almost HK$12,000 in 1993. In this period, Sokoloff co-founded the first pure Asian hedge fund.
  • The internet and ecommerce boom in the mid-1990s.
  • The Asian Financial Crisis starting around 1995. At the time, Malaysia had finished building the world’s tallest building (Petronas Towers), which to Sokoloff was a key signal.
  • The rise of crude oil prices. Sokoloff invested in oil in 2002, when it was only $20 a barrel, riding the trend to over $140 at its peak in June 2008.

Speaking on behalf of 13D, he says “over the last 40 years, I don’t think we’ve missed a single major technological transformation”. Over the span of three years, the company made more than 178 recommendations that were acted upon by others while using his strategy.

What Are Some Of The Biggest Investment Themes Today?

Sokoloff considers the biggest theme today to be “disruption”. This is mainly in the form of a digital revolution, of which he spotted the early signs in 1988.

Starting with the recording industry, this has spread from industry to industry, leading to the modern developments of 5G, artificial intelligence (AI), cryptocurrency and blockchain, gene editing and many other industries using innovative technologies.

According to FactSet, these are some of the most popular markets that investors plan to pursue in the future when creating a portfolio, and they also make a up a large proportion of 13D’s focus.

Research conducted by FactSet and Forbes in 2021 found that 28% of an investor’s current portfolio lies with thematic instruments or strategies, and this percentage is expected to increase to 42% within the next three years.

Sokoloff shares the belief that “today’s markets are very deceptive” and “there are a lot of false breakouts and false breakdowns”, which may explain why thematic investing is appealing for more “careful” investors who wish to spread risk across multiple assets.

In fact, assets in thematic exchange-traded funds have grown at an average of 45% annually, according to the Wall Street Journal, and this rate may only increase in the future.

Want to hear the full interview? Listen to Kiril Sokoloff’s podcast on CMC’s website.