Once a trend has been identified, the portfolio manager hunts for companies that are best positioned to benefit as they unfold.

The whole strategy rests on a pretty compelling idea: that earnings surprises are what really drive share prices, and that markets often miss the powerful underlying trends that fuel unexpectedly strong growth.

Look no further than current market darling Nvidia as an example of the strategy at work. When ChatGPT was launched in November 2022, it signalled that artificial intelligence had truly arrived, and the megacap technology companies would need to spend up big to ride the trend. As the leading designer of graphics processing units (GPUs) needed to train AI models, Nvidia became a must-own stock for thematic investors, despite its seemingly lofty valuation.

The company’s earnings growth surprised even the most bullish investor, with profit rising from US$10b (NZ$16.7) in 2022 to a projected US$73b in 2025. The share price has also blown past expectations, rewarding investors with a 1200% return since late 2022. Nvidia is now the most valuable company in the world.

Another popular theme in recent years has been the breakthrough GLP-1 weight loss drugs (Ozempic, Wegovy and the like). Safety wasn’t a major concern given GLP-1s had been used to treat diabetes for decades, and the improving efficacy of the drugs in trial results pointed to a large and growing market. Two companies were ideally positioned to dominate the GLP market – Eli Lilly from the US and Denmark’s Novo Nordisk – and both saw their share prices double in a short time.

Lilly and Novo have come back to earth recently, dogged by cheap imitations and drug pricing fears. Fortunately, thematic investing isn’t a buy-and-hold strategy. It’s a dynamic style, designed to adapt to the rapidly changing world we live in.

Not all investment themes have to be headline grabbers – they can be as exciting as space travel and genomics, or as mundane as waste management and discount retailing. The trick is to identify a trend that will boost company profits above current market expectations, which should lead to share price outperformance.

There are some real advantages to a thematic investment approach that make it appealing to many investors.

Flexibility is probably the biggest one. These portfolios can pivot quickly when market conditions change. By focusing on large-cap, liquid stocks, trading costs stay manageable, which means managers can exit underperforming investments swiftly and jump into new opportunities just as fast. In our rapidly changing world, where trends can spread globally almost overnight, this agility is invaluable.

The approach also offers consistency in a different way than you might expect. Because thematic investing doesn’t lock you into a rigid investment style, it can potentially deliver above-market returns throughout different parts of the economic cycle. Portfolio managers can adjust their focus – maybe emphasising long-term sustainable growth during certain periods, then shifting toward cyclical stocks when economic growth picks up steam.

Perhaps most interesting is the insight you gain. When you’re investing across diverse themes and industries, you develop a comprehensive view of what’s happening in the global economy. This broader perspective can help you spot major changes coming down the pipeline and adjust accordingly.

Of course, thematic investing isn’t right for everyone, and it’s important to be realistic about what you’re signing up for.

This is actively managed investing with a heavy focus on growth assets – we’re talking predominantly large-cap international equities with very little allocated to income-generating assets. That means you should expect high volatility.

It’s crucial to understand that trade-off between risk and potential return. All investing involves risk, but the level and nature of that risk varies considerably depending on where and how your money is invested.

As our global economy continues to evolve at breakneck speed, thematic investing offers a way to position yourself around the powerful trends shaping tomorrow’s markets. In a world where change happens faster than ever, thoughtful positioning today might matter more than it ever has before.

Generate is a New Zealand-owned investment KiwiSaver and Managed Fund provider managing over $8 billion on behalf of more than 175,000 New Zealanders.

This article is intended for general information only and should not be considered financial advice. The views expressed are those of the author. All investments carry risk, and past performance is not indicative of future results.

To see Generate’s Financial Advice Provider Disclosure Statement or Product Disclosure Statement, go to www.generatewealth.co.nz/advertising-disclosures/. The issuer is Generate Investment Management Limited. Past performance is not indicative of future performance.

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