How Can Equity Investors Capture the Power of Thematic Investing?
In our view, investors looking to capture the power of disruption through thematic investing should follow a three-pronged strategy:
1. Take a multi-themed approach focused on sustainable earnings growth
• A multi-themed approach can help capture a wider range of return streams while reducing concentration risk. Disruptive innovation is happening across all sectors, and there are ample opportunities beyond hyperscalers and chipmakers.
2. Consider active management
• Active, thematic management can identify high-conviction themes, balance established leaders with emerging innovators and manage both valuation and concentration risk.
• The goal is not simply to chase change but to convert disruption into a more thoughtful and resilient equity allocation. We believe that can be achieved by following earnings revisions because the best investments tend to be stocks with underestimated growth potential. Similarly, investors must pay close attention to business models to determine whether a hot stock is just a fleeting trend or part of a larger structural shift. A long-term competitive moat and defensible pricing power and profit pool are key considerations.
3. Avoid overreliance on legacy defensiveness
• Even business models long viewed as defensive can be disrupted—sometimes very quickly.
• This makes the case for reassessing “safe” areas of the market through a forward-looking lens, rather than relying on historical labels.
Why Benchmarks May Miss Future Leaders
In our view, investors hoping to identify disruptors before they take off may be disappointed by benchmark-hugging passive strategies.
During periods of disruption, strategies that track benchmark indices often miss future innovators. That’s because many of these indices are backward looking—they’re constructed using historical data. Typically, companies that have already risen in value are assigned higher weights in the index, while those that have underperformed are assigned lower weights. As a result, a backward-looking strategy fails to account for future disruption at the moment of inflection. We believe an active, thematic approach is better suited to identifying the most innovative companies well before they’re reflected in passive benchmarks.
In a market dominated by disruptors, investors can ill afford to rely on yesterday’s winners. The next leaders may emerge from many corners of the market, but finding them requires a fundamental, research-driven approach. For investors willing to look beyond benchmarks, thematic investing can be a powerful way to capture lasting growth in a transformational era.
