Sometimes a nice story can fool even the most astute investor, which is why it’s always worthwhile to do your own homework beforehand.
A good starting point is to consider whether the theme the fund is covering displays any obvious pitfalls – and, if not, whether the companies that are shortlisted fit the bill.
Bear in mind the possibility of unforeseen risks, too. Even if you are convinced that a particular consumption pattern will develop, a change in government policy or advances in technology could one day cause the unthinkable to happen.
Hedge your bets
Frances Hudson, global thematic strategist at Standard Life Investments, has witnessed many big themes go bad over the years. For this reason, she believes that funds should sometimes seek to hedge their bets by investing simultaneously in two competing technologies.
“You keep the theme as broad as possible,” she says. “For example, in automotive technology you want to hedge your bets, so you want to pay attention to hydrogen fuel cells as well as lithium-ion batteries.
“And you need to look for the companies that might deliver. You also should look at things like sharing society. What happens to Uber? And, if you do have self-driving cars with electric vehicles, what’s happening to the infrastructure side and the charging stations. If the charging infrastructure is not there, then that will block the take up of it.
“You can build a part of your portfolio around that. You need to reassess it periodically. And if things change then you change your allocations and you change your investments.”
Ms Hudson believes these types of considerations generally separate the successful thematic investors from the losers – and, above all, offer a decent case for why investors should consider paying an experienced fund manager to actively manage their money.
Getting to the table fast enough
Once a theme attracts enough attention to warrant corporate investment and fund launches, the chances are its potential will start to make headlines. When word emerges that a stock is at the forefront of the next big breakthrough, and being backed by major institutional investors, its share price is likely to rocket to all-time highs.
This ultimately means that the majority of stocks exposed to heavily advertised megatrends can quickly appear expensive, at least based on their own historic standards.
Growth investors usually approach this conundrum by focusing on whether the future potential of the company has been fully priced into the valuation. Such an approach naturally relies mainly on guesswork.
