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Tech, Energy Transition Drive Thematic Boom

Morningstar research highlights recent explosion of thematic funds. 

The global thematic investment market hit US$806 billion in assets by the end of 2021, according to research provider Morningstar, but asset owners “must be cautious” when using thematic funds to pursue positive environmental and social impacts.  

Thematic funds now represent 2.7% of all assets invested in equity fund globally, up from 0.8% 10 years ago, said Morningstar in a new report. In 2021 Q1 alone, thematic funds attracted US$56 billion in net flows. 

A record 589 new thematic funds debuted globally in 2021, more than double the previous record of 271 new launches in 2020.  

Fund launches covering energy transition, digital economy, and future mobility themes accounted for 40% of all new launches last year. Technology-related themed funds led the way, with US$105 billion in assets. Sustainable themes relating to the energy transition (such as alternative energy-focused funds) closely followed, with US$98 billion in assets. 

The growth of thematic funds has been “uneven across geographies”, the report said. While Europe-domiciled thematic funds grew to 55% of total thematic funds globally in 2021, the US thematic funds’ market shrank from 51% to 21%.  

The number of Canadian thematic funds is also growing strongly, representing C$2.6 billion of the Canadian fund universe at the end of 2021, compared to C$405 million in 2016. Meanwhile, China launched 159 new thematic funds last year, pushing their total to 373. 

In Japan, more than 90% of thematic fund assets were focused on technology, whereas the energy transition theme was especially popular among Chinese investors, with 34 funds (20% of total Chinese thematic assets) targeting alternative energy. “Funds within this group mainly invest in companies engaged in generation and distribution of alternative energy, such as solar and other forms of clean energy,” the report said. 

Three-quarters of thematic assets globally are actively managed, Morningstar said. Ninety percent of thematic fund assets in Europe are active, whereas 71% of thematic fund assets in the US are passive; the latter reflecting the popularity of ETFs in the region. Ninety-eight percent of thematic assets in both Japan and India are actively managed, while 55-80% of thematic assets in Australia, China, Hong Kong and South Korea are passive.  

Kenneth Lamont, Senior Manager Research Analyst of Passive Strategies at Morningstar, told ESG Investor that a number of the assessed funds could be used by investors to contribute to their ESG-related targets or the UN Sustainable Development Goals (SDGs), but that they must exercise caution, as thematic funds “may not meet all an investor’s criteria”.  

“A future mobility fund may invest in firms which lead the way on environmental transport solutions, but may also invest in lithium miners or other companies which may have other questionable environmental or social impacts,” he warned.  

Thematic funds have proven popular amongst sustainability-focused investors looking to positively contribute towards a number of environmental and social themes. In particular, thematic funds targeting specific UN SDGs are sought out.  

“The current crop of thematic funds is undoubtedly going to be superseded by even more targeted options which even more clearly align with given SDGs,” Lamont said. 

“In the meantime, the current crop of funds may still have their place in the sustainable investor’s toolkit.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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