### Thematic Investing: Strategies for Long-Term Growth

Successful thematic investing requires identifying long-term trends and diversifying across companies to manage risks effectively.

### Thematic Investing: Identifying Trends for Long-Term Success
* 📈 Some of the greatest investors, like John Templeton, succeed by **identifying long-term trends** and investing in companies that benefit from them, such as his **significant investments in Japan during its post-war recovery**.
* 🔍 Thematic investing involves recognizing key trends—such as **AI, energy transition, and cybersecurity**—and diversifying across these themes to **manage risks effectively**.
* 💡 Successful thematic investing requires three steps: **identifying a long-term trend**, **selecting the right companies**, and **continuously monitoring and potentially rebalancing your portfolio**.
* 💰 Current trends include artificial intelligence, which is **revolutionizing drug discovery**, and the energy transition, focusing on **renewable energy infrastructure** and commodities like **copper**.
* 🌍 Behavioral trends, such as **experiential spending** and **increased online security needs**, as well as reshoring due to **geopolitical concerns**, also present investment opportunities.
* 🔄 Diversifying investments across multiple themes is crucial to **mitigate risks associated with single-theme investments**, as evidenced by the failed Stemmann Oceanographic Fund.
* 📊 When investing, consider market volatility and the timing of entry, as **crowded trades can lead to overvaluation**, but **technological advancements can also create opportunities for growth**.
* 🔑 Ultimately, thorough research and a long-term commitment to chosen themes are essential for successful thematic investing, ensuring you are **prepared for market fluctuations and changes in trends**.

Some of the greatest investors succeed by identifying long-term trends and buying companies that stand to benefit from those themes. In this video, we explore thematic investing, focusing on current long-term trends like AI, the energy transition, and cyber security. We also highlight the importance of

diversifying across themes, and this is to manage risks. We also consider potential pitfalls. Also, I offer some suggestions on when to buy and sell themes. Today's video is sponsored by WisdomTree, one of the leading ETF providers globally. Arguably one of the

greatest investors in trends was John Templeton. For example, in the 1950s and 1960s, he invested heavily in Japan. At the time, Japan was perceived by many Western investors as an industrial backwater, still recovering from the Second World War and producing

low-quality products. Through analysis of the culture and business practices in Japan, Templeton foresaw the postwar recovery of Japan and also bought Japanese stocks at multiples of four times. And this is when the US was trading at 20 times earnings. Now eventually, the Japanese government

liberalized its economy and allowed more foreign investment. And this allowed Templeton to invest heavily in Japan. At one point, his Templeton Growth Fund was 50% invested in Japanese stocks. And partly as a result of these Japanese investments, he managed to have

investment returns of 15% over 38 years. So John Templeton very clearly characterizes a style of investing which would be described as thematic. He invested in companies, in this case Japanese companies, which would benefit from a long-term trend of economic recovery in Japan. So the steps to

Successful thematic investing has three key elements. First, you need to identify the long-term trend. Second, you need to correctly identify the companies that will benefit from that trend. But at that point, it's not a set-and-forget operation. You still

have to monitor the theme to see whether it's still intact and potentially rebalance the portfolio as other companies come to the fore to benefit from the long-term change. So there are two ways of approaching thematic investing. One of them is to invest in single stocks yourself. Having identified

the theme, you'd work out which companies stand to benefit from that theme and invest in a portfolio of those stocks. Now, that requires a lot of time and energy on your part, and many people wouldn't have the inclination or the ability to do that. So what many of us choose to do

is to find a fund which implements a particular theme and then simply buy that fund. Now, one of the drawbacks of that is that the fees for such funds are often a little bit higher than they would be for, say, a global equity index fund. So what you really have to do is to

weigh up the value that the fund manager is adding to you by managing the fund and consider whether it's worth the fee that you're paying for that. Now, let's look at some current trends and themes, and I'll talk about five of them here, but of course, there are very many

more. The first one, and this is at the forefront of all of our minds at the moment, is in artificial intelligence. So here you can see Demis Hassabis, who created Google's DeepMind, and one of the projects that he worked on was called AlphaFold. Now, what that does is

takes a gene sequence and it turns it into a 3D structure for a protein. The reason why that's a big deal is you can work out what the protein does. Here for example is a protein I worked on for my PhD thesis. Ironically, I knew exactly

what the protein sequence was. You can see that up at the top here, it was about 500 amino acids long, but I had absolutely no idea what the 3D structure of the protein would look like. But here you can see that structure as guessed by

AlphaFold. It would have been great to have this as a resource when I was doing my PhD. I could have figured out maybe where the protein binding sites were for anesthetics, and that was what my PhD thesis was about. So when it comes to drug discovery, if you can work out the

structure of these proteins, you could maybe find out where the binding sites are and create new and innovative drugs. But also, you can work out how many of these proteins might function just by knowing their 3D structure or a reasonably good guess at it. So by solving specific

problems like the protein folding problem that we just saw, but also by producing things like large language models that help us write our emails, but also make up really bad poems and awful pictures, AI has pretty much transformed our lives already and it looks like it's

going to be able to do even more in the future as we think up new applications. Another long-term change that we see currently is the energy transition. So we could invest based on increasing demand for commodities such as copper, or we could invest in the companies which

create the infrastructure that's required to generate, store, and distribute renewable energy. Another type of trend might be behavioral. For example, many young people choose instead of buying stuff to buy experiences, and this is called experiential spending. For example, companies which offer holidays to exotic destinations might benefit

from this trend. So it's not just about investing in technological trends. Equally, we could have trends which are behavioral. One behavioral change is that we spend more time online, and that means that companies which manage our relationships online are really conscious of security. So companies which

provide software to ensure that these connections are secure, but also perhaps training in cybersecurity, stand to benefit from this trend. Our final trend is to do with reshoring. After the pandemic, many companies have chosen to move their manufacturing processes to their country of domicile, and that's

either as part of a political move or potentially a strategic choice. So for example, the US has chosen to repatriate some chip manufacturing capacity or perhaps it's simply to reduce transportation costs and have more control over supply chains. So this trend could be because of geopolitical

concerns, or it could just be practical ways of making your business more efficient. Now, I just touched on five themes, but as you can see there are dozens of these technological, environmental, demographic shifts going on right now. While this represents a snapshot right now, it's certain that

these themes are going to change in the future. So if we were to look at this picture in say 10 years' time, I suspect that many of the themes would be different. Today's video is sponsored by Wisdom Tree, one of the leading ETF providers globally. The Wisdom Tree Meat

Trend Investing ETFs offer investors exposure to companies at the forefront of various long-term trends like the energy transition and generative AI revolution. By investing in the WisdomTree Mega Trends US ETF, investors have a simple way to get diversified exposure

to various mega trends offering growth potential and diversification across themes. WisdomTree's expertise in thematic research and ETFs fuels a robust strategy focusing on growth, pure-play company selection, and a balance between concentration and stocks with the greatest exposure to a given theme and diversification. The unique

approach combines strategic thematic asset allocation with tactical adjustments to capitalize on current market trends while expert-driven stock selection minimizes overlap with established tech giants. This ETF provides a dynamic, diversified solution compared to traditional growth funds and delivers a curated portfolio of 16

promising themes for long-term growth. So, another way to invest in themes is to go for a multi-thematic fund where the fund manager identifies new themes, maybe calls old themes, and essentially manages this whole thematic investing style of investing at a higher level. Now, when I

speak to people who do invest in themes, they often just go for one theme and that's it. For example, it might be technology in the US. However, that comes with its own risks. So, one thing to consider is diversifying across themes. The reason for that is that you have to

consider what might happen if your theme doesn't come to fruition. For example, there was a fund called the Stemmann Oceanographic Fund, and this invested in companies aiming to farm and build communities underwater. This was inspired by Jacques Cousteau. I was a huge Jacques Cousteau fan.

as a little boy, but it actually had limited success, and the idea really didn't catch on. It was much more cost-efficient to have submersibles, remotely operated submersibles, operate under the water. So this is an example of one theme which seemed promising, but which just

didn't pan out. Now there are two ways to diversify your thematic investments. Firstly, I wouldn't bet the farm just on one thematic fund. You couldn't replace your global index funds, for example, with just one thematic fund. That would be very risky. So it might make sense to

hold global index funds alongside thematic funds. And the reason why you hold the thematic funds is to try and outperform the global index funds. Now that might work, it might not, but if you don't hold too large a percentage of your allocations in the thematic funds,

it won't be a huge risk to your portfolio. There's another way to diversify your thematic investing, and that's to diversify across different thematic funds themselves. Here, for example, you can see seven thematic funds which are offered by WisdomTree, and what I've done is to take their daily

returns, calculate the correlations, and then build this correlation tree. The idea here is that funds which are highly correlated, in other words, the prices move up and down together, are close together on the tree. The cloud computing and cyber security funds at the top, for example, have a correlation of 92%.

They very much move in lockstep up and down. So if you buy those two, they don't diversify one another. Whereas quite intuitively, I think, if you hold that cloud computing fund alongside the global automotive innovators fund, the correlation there is much lower. It's

just 55%, so those two funds will diversify one another much more than if they're in the same part of the market. Now bear in mind that once you do buy into a certain group of themes, there will be a lot of volatility. So from year to year, 

what you'd expect is big differences in return according to whether a trend becomes more popular or less popular. So for example, you can see that the rise of tension scheme so far year to date in September of 2024 was the best performer, and that's 

presumably because of geopolitical instability being at the front of people's minds, whereas sustainable energy storage was the weakest performer. So just be aware that there will be this volatility of things themes based on popularity which waxes and wanes. Finally, let's consider when to buy and 

sell a theme. Firstly, thematic investments will be popular by definition. By the time that funds exist for a given theme, it's going to be widely traded and it'll be what's called a crowded trade. Lots of people will be buying the same thing. Consequently, the 

valuation of stocks that stand to benefit from a theme may be pushed to high levels. This means that you could have bought a good theme, but you might have overpaid for it, and that could mean that you get lower returns in future. However, valuation is not the only 

consideration. Now, if we look at the AI theme in 2023 for example, we can see that many of the stocks that were linked to AI benefited from the launch of ChatGPT in November of 2022. And what happened after that launch is that the stocks that were linked to 

ChatGPT has surged in value. Nvidia, for example, gained almost 170% between the 30th of November 2022, and that's when ChatGPT launched, to the 13th of October 2023. So in the space of just one year, so unforeseeable technological

advances or regulatory changes could also drive performance, even if the valuations are initially high. And the reason for that is that these shifts in technology or regulation could create a surge in profits, such that the earnings rise to meet the price increase that we've already seen. So if you truly

believe in a long-term theme, then when that theme inevitably has a setback, you can buy it at a more reasonable price. So one way to approach the choice about when to invest is to wait for these events. It may have nothing to do with the theme itself, it just might be a

crisis which pulls down all stocks as investors become more risk-averse. But this could present you with an opportunity to buy initially or build your stake in a theme if you've already invested in it. The key question to ask is, is the theme still intact? If

it is and the price is depressed, that could be a good entry point. So I hope that's giving you some ideas on how to invest in these themes long-term and also how to diversify your investments, so that you're not betting the farm on just

one theme. But if you are going to use this approach, all I'd say is research the themes yourself and just make sure that it's something you're willing to stay with for a long period of time, because that's as always what's most likely to succeed. And as always, thank

Long Term Investing With Thematic ETFs

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Introduction to Thematic Investing and John Templeton's Example

Successful investors identify long-term trends and invest in companies benefiting from them.

The video explores thematic investing, focusing on AI, energy transition, and cybersecurity.

John Templeton's successful investment in Japan in the 1950s and 60s is highlighted as an example of thematic investing.

Three key elements of successful thematic investing are identifying long-term trends, identifying benefiting companies, and monitoring the theme.

Two approaches to thematic investing are investing in individual stocks or buying thematic funds.

Artificial intelligence (AI) is discussed, highlighting its transformative impact and potential for future applications.

The energy transition is presented as another theme, focusing on increasing demand for commodities and renewable energy infrastructure.

Experiential spending and the growth of online interactions are mentioned as behavioral trends with investment implications.

Cybersecurity is highlighted as a theme benefiting from increased online activity.

Reshoring of manufacturing processes is presented as a final theme, driven by political and strategic considerations.

Diversification and Risk Management in Thematic Investing

Diversification across themes is recommended to mitigate risks associated with individual themes failing to materialize.

The Stemmann Oceanographic Fund is used as a case study of a theme that did not succeed.

Two diversification strategies are suggested: holding global index funds alongside thematic funds and diversifying across different thematic funds.

Correlation analysis of WisdomTree thematic funds is used to illustrate diversification principles.

Thematic investments are often popular and crowded trades, potentially leading to overvaluation.

Valuation is not the only factor; unforeseen technological advances or regulatory changes can drive performance.

Setbacks in a theme can present buying opportunities at more reasonable prices.

The key question when considering investment timing is whether the theme remains intact.

The video concludes with a recommendation to research themes thoroughly and maintain a long-term perspective.