Is thematic investing diversified enough?

Nicole Sara Sivens
July 19, 2018
5 min read
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What is thematic investing?

Thematic investing is a method of investing with a focus on macroeconomic trends. When creating themed portfolios, stocks are chosen because of their connection to macro-level, long-term trends. Using Swell’s existing six themes as an example, you can see that we’ve bucketed our holdings according to their focus on innovation in a particular field. Other examples of thematic investing are portfolios comprised of female-led companies or ones with the sole focus of improving education.  

Is thematic investing a diverse-enough approach?

Diversification is where it’s at, we all know that. So while aligning our investments with trends and our values is great, will it really do the job? The short answer: Yes. It’s never a good idea to put all of your eggs in one basket, be it traditional investments, real estate, cash, or up-and-coming green tech stocks. However, when you include thematic investing as a part of your overall investment strategy, you truly diversify your finances and hedge against a volatile market.

Diving head first into thematic investing is appealing, especially when we see how innovation and technology are reshaping the world. How do you tell the difference between true, lasting innovation and ephemeral jumps? To avoid investing in a fad, themes should be screened and maintained for staying power, earnings potential, and strength. We used this methodology when creating all of our portfolios, including our latest addition, the Impact 400.  

Creating a diverse thematic portfolio

Many of our investors care deeply about all 6 of our themes and choose to invest across all of our offerings. But is that the same as diversification? Not really. There are a few holdings that are innovating profitably in a few different industries – AECOM is a great example. You’ll find AECOM in our Zero Waste, Renewable Energy, and Clean Water portfolios because of its work with oil companies to improve air quality and reduce emissions, and its program management for water recycling and distribution systems.

It might seem like you’re diversified by investing across several themes, but by having this company represented repetitively in your collective portfolio, you’re investing more of your money proportionally than in a company that is just in one.

True diversity is investing across sectors

So what’s the answer? Creating a portfolio that is on-theme, but diverse across economic categories.

Our research team dug in and looked at tens of thousands of companies to find just a few hundred that met our criteria. The companies needed to meet these requirements:

  1. Have at least one woman or minority on the board or in the C-suite
  2. Derive revenue from business aligned with the 17 UN Sustainable Development Goals
  3. Represent  broader sector selection than we’ve previously explored

The answer is the Impact 400

If you’re focusing on long-term growth and you want to capitalize on movements in the market, then themes are a great strategy. By investing in a thematically curated, but sector-diversified portfolio, you can combine the benefits of this style of investment with the security of ones that aren’t reliant on a single part of the economy.

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