How to implement a portfolio thematic allocation ?

Abstract

In 1967, when Benjamin Braddock was advised to invest in plastics in the film “The Graduate”, it was the very first time investors had heard about thematic investing. Thereafter, practitioners of thematic strategies remained in a minority, until very recently. In a recovering financial world that has been experiencing one of - if not the most - acute crises in history since 2008, investors now seek new types of opportunities in order to create wealth. In this purpose, more exotic investment strategies among which thematic investing take on greater significance. Thematic investing is now booming and the opportunities are springing up everywhere. Though very promising, thematic strategies are usually misunderstood in practice and investors miss a clear portfolio thematic allocation methodology. Indeed, as of today, thematic actors are generally institutional investors that deliberately develop in-house implementation methodologies to maintain the culture of secrecy. In this context, this thesis intends to clearly define all the subtleties of this new trend in investment and determine a portfolio thematic allocation methodology. To meet these objectives, the different professional understandings of the movement are first addressed to formally define thematic investing and determine the characteristics of the approach. I also raise awareness about the traditional misunderstanding that sector investing or what is called “sub-theme” investing is thematic investing since real thematic strategies aggregate those identified sub-themes around cross-sector and cross-region megatrends that will impact societies. Then, the empirical section reveals how funds are identified as the best thematic vehicles and an inventory of thematic vehicles is established. Those mapped vehicles are later used to construct sub-theme portfolios then megatrend portfolios. A risk and performance analysis is carried out on those portfolios to put forward particular themes such as luxury and discretionary goods or biotech for the sub-themes and megatrends such as the technological revolution. Those constructed portfolios are later allocated following the methodology determined in this thesis that is a core-satellite approach. It combines a first allocation pocket that follows a traditional mean-variance Markowitz model to determine a risky fraction and a second risky allocation pocket to determine how risks should be embedded. Equally weighted and risk-parity allocations for different risk profiles are analyzed to deliver close results and finally elect the equally-weighted model for the risky pocket allocation. To conclude, I advise investors on how to anticipate trends and open a debate around the future outlook of thematic strategies.