The popularity of thematic investing has grown by leaps and bounds in recent years. So have the risks.
It is one thing to identify a macro theme for investment, but quite another to assemble a portfolio of companies that closely follows this theme. Oftentimes, thematic strategies represent long-term trends that don’t align with traditional industry classifications, and companies often do not report their financial results in a manner that clearly aligns with a targeted theme. The result can be a watered-down representation of the portfolio result the investor is trying to achieve.
Morningstar has developed a market consensus-based approach to identify stocks most clearly associated with each theme. In new analysis, Morningstar Indexes outlines a new methodology using insights from Morningstar Manager Research and Morningstar Quantitative Research to identify companies where there is broad investor consensus of relevance to a particular theme. The resulting Theme Consensus Fit Score methodology is a key part of the new Morningstar Thematic Consensus Indexes. Companies must receive a ranking of “3,” the highest consensus for a score, to be eligible for the indexes. This score indicates that a company is widely held across funds that target the same theme and helps ensure that companies associated with multiple themes are de-emphasized.
Theme Consensus Fit Score Example – Future Mobility Theme
Alex Bryan – Director of Equity Product Management, Morningstar Indexes:
“Index investing is based on the belief that the market’s collective wisdom is hard to consistently beat. Applying a market-driven approach to thematic investing across our 15 new Morningstar Thematic Consensus Indexes has enabled us to provide a more representative solution for defining thematic exposure.”
Kenneth Lamont, Senior Analyst, Morningstar Manager Research:
“When investing thematically, focus can often be a critical factor in determining long-term success. The value of identifying a compelling long-term macro theme can quickly diminish if the companies underneath this theme are not fully aligned. Drawing on the ‘wisdom of the crowd,’ — i.e., validating that your companies are widely held by investment funds targeting the same theme — can be a good approach.”
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