September 07, 2021

September 07, 2021 | Adviser News

The Seven Sins of Thematic Investing: Sin No. 2 Foggy Forecasting

by Lazard Asset Management


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. We source most of our ideas from discussions with companies themselves, as they will be allocating the capital that will drive structural change. Managers should be humble about their ability to predict future outcomes amid unforeseeable risks and be wary of attempts at optimization around an inherently uncertain future.


Implementation Risk


Lazard Global Thematic Approach

Underestimating future uncertainty
“Inevitable” changes fail to materialize.
Source likely structural changes from empirical company observations to improve scenario analysis
Inadequate analysis of interaction between structural changes
Focus on one aspect of future change (e.g.,disruption, sustainability) but hold others constant Combine multiple structural changes and their interactions into a view of the next decade
Excessive confidence based on false precision
Process built on long-term target prices, leading to excess concentration or continual optimization Portfolio construction designed to allow for “unknown unknowns”.

The source of thematic ideas matters a lot. Popular perceptions of the future are frequently incorrect in terms of magnitude, direction, or timing. The primary aim of both the media and many “thought leaders” is to attract eyeballs, rather than to offer up rigorous accountability, which should be an unsettling thought to those investing in products that treat these sources as primary proof points and actionable information.

We believe that thematic insights should be grounded in real-world experience. That’s why company management teams are the primary source of our understanding of the most significant structural changes of the next decade. We meet with a large number of management teams each year who offer direct data points about structural changes within their industries, economies, and markets. As the companies will likely be key enablers of these structural changes and are deploying capital to make them happen, their views represent an invaluable primary source.

It should be noted that we approach our conversations with a healthy dose of skepticism. We supplement them with information from our global research team and seek conflicting views by speaking to, for example, both incumbents and disruptors. Having the experience and expertise to properly evaluate and weigh the information that comes out of these discussions is, in our view, a widely underappreciated investment attribute. We discuss this further in Sin No. 7, “The Wrong Resume”.

Insights from our meetings form the basis of our Global Framework, an overview of how we think the world will change over the next decade. Yet, crucially, structural changes do not happen in isolation. The Global Framework blends together all the key structural changes we identify in a single place, ensuring we consider the interactions between them. This is preferable to the unrealistic assumption that any strategy can perfectly isolate a single structural change.

Even if they are inspired by a manager’s vision, investors should also expect the people managing their money to be humble about their ability to know the future. For thematic managers, this humility needs to be incorporated from first principles, starting with the investment philosophy and carrying right through to stock selection and position sizing. Features such as 10-year target prices, extreme outsized positions in single stocks, or excessively precise optimization of theme or stock weights are, in our view, red flags that suggest hubris.

Questions to Ask the Manager

  1. Where do you look for ideas?
  2. Does your outlook consider a wide range of inputs, including those that conflict with your thesis?
  3. Does the strategy consider interaction between structural changes or hold non-targeted changes as constants?
  4. How does it affect the portfolio if an aspect of your manager’s vision of the future turns out to be wrong?
  5. Does the process or portfolio exhibit signs of false precision in terms of long-term target prices or position size management?
  6. Does the portfolio management team seem to accept the fact of long-term uncertainty and acknowledge their own limitations in predicting the future?

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. 1 Narrative Fallacies

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

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.

Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. DFOY-017433-2021