September 07, 2021

September 07, 2021 | Adviser News

The Seven Sins of Thematic Investing: Sin No. 1 Narrative Fallacies

by Lazard Asset Management


Thematic strategies are particularly vulnerable to building themes around slick, but ultimately empty, marketing narratives rather than genuine return opportunities.

Single-theme strategies are likewise susceptible to narrative fallacies as they create additional incentives for confirmation bias, in which investment teams seek out evidence that confirms a strategy’s relevance and ignore evidence that undermines it. These risks can be mitigated by introducing competition for capital across multiple themes.


Implementation Risk


Lazard Global Thematic Approach

Narrative fallacies Simple, appealing stories which ultimately do not translate into investment returns Themes must represent a genuine underlying investment opportunity.
Single-theme strategies Outsources the key decision of theme selection; greater risk of confirmation bias and agency problems in assessment and disclosure of theme merits, risks, and expiry conditions. Multi-theme approach establishes competition for capital between themes; theme selection insourced and acknowledged as portfolio manager’s responsibility and source of added value.

Long-term investors are highly susceptible to what we call the narrative fallacy - an appealing story that fails to translate into long-term investment returns. We believe a theme should represent not just a broad idea but a potentially positive long-term investment opportunity. The world of thematic investing is unfortunately rife with products that capture the imagination but on further scrutiny do not confer a genuine benefit in terms of return, risk, or sustainability objectives. This commercial window dressing does a disservice to more robust thematic strategies, which may find themselves dismissed without due consideration.

The narrative fallacy problem poses a particularly potent risk when a single theme is the entire investment proposition. Single-theme strategies should come with a crucial acknowledgment: They outsource to the client one of the most critical investment questions - is this theme a good investment?

To be clear, single-theme strategies can be robust investments, and some clients and asset owners will have the knowledge and expertise to select winning themes. Yet, single-theme strategies compound agency risks around confirmation bias, in which the portfolio manager seeks corroborating evidence to support the thematic thesis and discards evidence that undermines it. The alternative - retiring the theme and hence closing the strategy - is typically an unpalatable option.

In contrast, a key benefit of multi-theme portfolios is that they ensure competition for capital across themes. When the retirement of a theme is not an existential crisis for a money manager, but rather an allocation decision, it can be approached dispassionately. There is every incentive to identify the themes that are truly compelling at any given time and no penalty for an honest assessment that a theme has run its course.

Questions to Ask the Manager

  1. How does each theme reflect an underlying return opportunity?
  2. What themes have you considered and rejected?
  3. Where could the overall thesis of a single-theme strategy be wrong?
  4. Under what circumstances would you retire or change the strategy or theme(s)?

September 07, 2021

Insights from our Partners: The Seven Sins of Thematic Investing

Lazard Asset Management’s Global Thematic Equity team shares its decades of experience in identifying and avoiding the seven sins of thematic investing.

September 07, 2021

Insights from our Partners: Sin No. 2 Foggy Forecasting

Forecasting, particularly as far out as the next decade, is at best imprecise and at worst dangerous. Investors should ask managers where their ideas originate and prioritize sources grounded in real-world experience rather than popular consensus.

September 07, 2021

Insights from our Partners: Sin No. 3 Sledgehammer Scope

Generic investment ideas are sledgehammers - simple, broadly defined investment propositions that make an immediate marketing impact but can leave lasting damage to portfolios. Themes that are designed too broadly in scope may not target the actual return opportunity.

September 07, 2021

Insights from our Partners: Sin No. 4 Puzzling Purity

Stocks that appear to be valid candidates for a theme might actually have very little relevance.

September 07, 2021

Insights from our Partners: Sin No. 5 One-Trick Pony

Having multiple themes is of no benefit if they are all the same underneath the surface.

September 07, 2021

Insights from our Partners: Sin No. 6 Failure to Integrate

We observe that managers tend to make three mistakes when claiming to incorporate sustainability into their investment processes: failing to do it, pretending to do it, or doing it badly.

September 07, 2021

Insights from our Partners: Sin No. 7 The Wrong Resume

Genuine thematic experience is scarce. We believe it is crucial that investment teams on thematic strategies have had specific training and experience in analyzing many structural changes, not just time in the market.


Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated August 2021, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such.  Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 118 Mount Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.

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