Humans and machines: defining thematics in the new world

As the world changes before our eyes, investment stories reshape while others stand still.

But understanding themes is not always straightforward and it requires help from both humans and data. This panel looks at the various approaches to thematic investing and how to discern how the winners of the past and today can be the winners of tomorrow too.


  • Chanchal Samadder, CFA, Head of Product Strategy, Lyxor ETF
  • Jean-Maurice Ladure, CFA, Executive Director and Head of Equity Applied Research, EMEA, MSCI
  • Lukas Neckermann, Managing Director, Neckermann Strategic Advisors
  • Massimo Ricatti, Portfolio Manager – multimanager division, BCC Risparmio & Previdenza
  • Andrew Summers, Head of Collectives and Fund Research, Investec Wealth & Investment
  • Valentina Romeo, Deputy Editor, Citywire Engage

Valentina Romeo: Do you prefer an active or passive approach with thematics?

Andrew Summers:    I do think that it is possible to construct thematic ETFs through the use of quantitative data, but at the margin we think that active management is probably superior and it is worth paying the extra money. We believe that the evidence shows that companies with the most exposure to long-term structural growth themes and the winners of the future are likely to have actually, been the winners today and are actually, likely to have been the winners of the past in many instances.  That’s why, when you see a lot of thematic ETFs, you do see a lot of companies that the average person on the street would look at and say, that’s not a thematic company of the future, that’s a thematic company today.

Massimo Ricatti:   It depends on the characteristics of the theme.  It’s not just a matter of cost because many people think about ETFs as a cheaper way to gain exposure to particular themes.  This is true, mostly for a broad indexed approach, but for thematic investment, ETFs are not as cheap as the broad passive ETFs and some broad active funds.  We think that if they are very specialised themes, there are less opportunities for active management to deliver consistent alpha, considering the cost difference.  Otherwise, another kind of theme, especially, themes that embrace more than one sector, multi-sector themes.  I was thinking about, for example, the aging population theme, it embraces the healthcare sector, but also sectors like leisure, consumer discretionary, finance, other kinds of themes that suffer in the coronavirus outbreak. In this case the top-down view of the PM could change the allocation to different sectors and deliver alpha.

Valentina Romeo: Chan, is the passive approach really that inhuman?

Chanchal Samadder: We definitely don’t think that passive is the only way or the better way to do this.  As you find with most investment thesis and styles, most robust portfolio outcomes are achieved when you blend both active and passive together and that’s in quant, in fundamental and we think, in thematics.

Without the human creativity and the freedom of thought and actually, just having the direction of thought that a human can demonstrate but that a machine can’t quite replicate, that really is an input required within those kinds of portfolios.

The approach we’ve taken with MSCI is actually, a very blended approach because the traditional, purely hard-nosed quantitative approach does not work and that’s why with MSCI, we’re working with people like Lukas, to really bring that real deep human expertise, not to financially select stocks, but to give direction to the theme.  Then, we rely on NLP, artificial intelligence, to scan huge, huge amounts of sometimes not very structured data, to really capture the elements that are important.

Valentina Romeo: Jean-Maurice, how did you see the active and passive approaches develop when it comes to thematics?

Jean-Maurice Ladure: We used to create market cap indices, sector indices, factor indices and others.  In developing solutions for thematic investing, we were able to keep the DNA that we have at MSCI, in terms of quality of data and a disciplined and rule-based systematic approach, but we also realised that thematic was very different from the other approaches.  It is a lot more forward-looking and global.  Therefore, it does not really make much sense to do a thematic on a country. Thematic investing goes across geographies and across size segments.  Our starting universe is ACWI-IMI, which is developed and emerging markets, large, mid, and small-cap. In those small-caps that you can find some of the pure players.

We don’t want to anchor ourselves to a rigid pre-existing classification like sectors.  We really want to capture the full value chain.

Valentina Romeo: How do we define a theme?  Also, how to distinguish that from the actual long-term to something that’s very exciting, but might just be a nice story to tell now?

Lukas Neckermann: When we talk about future mobility, we’re also working within an ecosystem that includes things like public transport, including renewable energies and energy charging, energy storage.  Then, we do go into other spaces as well, including travel and that means that the mobility ecosystem in the value chain is much, much broader than the automobile before it. That’s why we talk about a brand-new industry, certainly, on the mobility side. 

On the smart city side, it’s slightly different.  It’s actually almost the inverse because we’re taking lots of elements of industries that have existed before, for example, energy.  Energy is a very significant part of smart cities, but so is data management, so is infrastructure.  These pieces all existed before.   So, the challenge is, how do you look at those industries and figure out which companies and which parts of those industries are ‘smart’.  Now, that’s a bit of a vague term.  What makes energy smart and what energy is dumb?  There is a way of looking at it and certainly, there are filters also, that are applied, including the ESG filters, which will clearly differentiate smart cities.

Andrew Summers:    At a high level, clearly [a theme] is something that is profound, it’s persistent, it’s enduring, it’s structural, it’s non-cyclical and the obvious ones we all know are things like demographics, automation, a connected consumer, cleaner economy.

The question for us very much is, how do you actually make money out of this in the long-run, rather than just being over simplistic and lazy, if you will, by just buying the obvious names.  It also is important differentiating between a theme and a fad because we believe that actually, a lot of investors probably invest in fads rather than themes because they probably know that it might not necessarily be an enduring 20 year theme. 

Lukas very rightly alluded to existing industries involved in smart cities, for example, so whereas you can look at a thematic portfolio today and see Mastercard in there or Tesla in there and they are today’s winners, there will be many situations actually, where today’s winners are probably not the right place to make money because their thematic exposure has already been recognised and is already in the price. Therefore, it’s about looking well beyond that to tomorrow’s winners.

Massimo Ricatti: The most important thing is to be rational because if you are looking at “fashionable” themes, you are missing the long-term structural growth.  The first thing to do is to understand whether a trend is driven by a disruptive structural force and not short-term bias or short-term force, a force that can effectively change the course of the global economy, and can redefine also, the business models of companies.  If we think about ten years ago, 20 years ago, when we think about the iPhone revolution, when we think about the social network, they were a disruption in the early stages. If a theme embraces all these features, it’s harder for any government, any organisation to change the natural trajectory that the theme follows.

You need to understand if there are these structural forces behind every theme you select to be included in your portfolio and also, you have to consider the returns that these themes can deliver over the long-term.

Chanchal Samadder: I have a list of 80 themes, which could maybe fit into these megatrends, but just taking again, a very disciplined and structured view to this and just really asking ourselves the question, is this long-term, is this impactful and also, is this broad?

A lot of these themes are very niche and narrow and some of them, they’re on the edge.  They may be a long-term trend tomorrow.  We are not sure. 

With MSCI, we thought about the design of the indices, and usually everyone’s overweight FAANGs and BATs. If you are owning a large-cap active manager or S&P500 or MSCI China, you are already massively overexposed to these stocks and what you don’t want in your thematic portfolio is even more exposure [to them].

We identify the companies, how to weigh them to make sure you’re getting really, ultimately, very good and broad and robust capture of the full opportunity set. 

Active managers can take high conviction views, but I think you’ll be kicking yourself if your thematic manager missed the next Alphabet or Alibaba.