September 07, 2021

September 07, 2021 | Adviser News

The Seven Sins of Thematic Investing: Sin No. 7 The Wrong Resume

by Lazard Asset Management


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. Covering a specific geography or industry, even for decades, might not produce enough learning opportunities. We advocate instead for a global, cross-sector approach. An independent relationship with highly experienced research analysts can provide a valuable reality check.


Implementation Risk


Lazard Global Thematic Approach

Lack of specialization in structural change Narrow focus on a specific geography, sector, or style does not provide sufficient observations to learn about broader structural change. Specialized, experienced team focused on structural change, regardless of geography, sector, or style. Ability to cross-reference many observations
Constrained mandates Narrow focus on specific geography, sector, or style limits opportunities for theme identification or implementation. Global unconstrained approach to maximize knowledge transfer and identify best ideas
Lack of specific geographical or sector knowledge Focus on structural change at the expense of geographic, industry, and stock-specific knowledge Support from global research platform with deep geographical and industry expertise
Analyst-level confirmation bias Analysts dedicated to a specific theme or stocks in the portfolio emphasize corroborating data at the expense of data that challenges the thesis. Dedicated multi-theme team is responsible for theme selection. Independent research platform can challenge thematic and stock-level thesis without negative consequences.

The final category of potential mistakes revolves around the organization and expertise of the portfolio team and the broader resources of the asset management firm.

We believe strongly that experience in analyzing structural change is very valuable. An investment manager need not be characterized as a “thematic manager” to know plenty about structural change. We do, however, think the inverse is true. A deep, broad knowledge of structural change should be a prerequisite for a manager purporting to have thematic investing expertise. Indeed, a client appointing a thematic manager is probably doing so in the belief that the manager specializes in understanding structural change and how to translate it into investment objectives. Yet, learning about structural change can be a slow process and is often assumed to be only inherited by osmosis after years in the market.

In our experience, covering a specific geography or industry, even for decades, might not produce enough learning opportunities to provide the appropriate context when analyzing structural change. Structural change tends to cut across industries, styles, and geography, blurring the boundaries between them and creating a high degree of commonality among the challenges facing companies today. There are therefore good reasons for thinking about structural change in unconstrained terms.

We feel that a global cross-sector approach offers the greatest opportunity to learn how structural change really occurs. We have typically trained our own team members in the key concepts and constructs behind the analysis of structural change and the implementation of a thematic strategy. Over time, this knowledge represents an information advantage that matters more than the investment team’s years of experience.

In terms of skill sets, thematic investing requires a blend of lateral “big-picture” thinking and attention to detail which takes time to accrue at both the individual and the team level. We also value a collegial approach, as the ability to debate openly every possible aspect of an investment decision in a constructive environment is of great cultural importance. No one person has all the answers.

Investors should also consider how a portfolio management team uses the broader resources of the firm - specifically, the research analysts who have crucial knowledge of sector and idiosyncratic stock issues. Is the optimal research team composed of analysts dedicated to a specific theme, or should the team leverage a firm-wide research platform? Each approach has advantages and disadvantages, but we feel the alignment of interests is the most important factor. Analysts dedicated to a particular theme face the same problem as managers of single-theme strategies: confirmation bias. They may be tempted to ignore or discount evidence that the theme is no longer relevant because acknowledging it is arguing for their own obsolescence.

We resolve this tension by working closely with the firm’s broader research team but ultimately maintaining a respectful independence. Our research analysts support a broad range of mandates, including ours, and we can leverage their expertise and insights from over 4,000 company interactions per year. We view the presence of an independent research platform as a competitive advantage.

Questions to Ask the Manager

  1. What are the credentials of portfolio managers claiming expertise in structural change? Have they had specific training and experience in this area, or are they relying on years of industry experience in other non-thematic roles?
  2. What cross-checks are in place to ensure theme and stock selection validity? If sector or theme-specific analysts report directly to the portfolio team, are incentives aligned to avoid confirmation bias?
  3. How deep is the research platform supporting the thematic team’s efforts?
  4. Does the firm have a demonstrable track record of commitment and support to thematic investing?

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. 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.


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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