September 07, 2021
September 07, 2021 | Adviser News
The Seven Sins of Thematic Investing
by Lazard Asset Management
Thematic investing offers a compelling way to capture the most important structural changes of our time - but only if implementation is robust. A deeper understanding of implementation issues can help an investor ask the right questions to distinguish a genuine investment thesis from slick marketing.
Lazard’s Global Thematic Equity team shares its decades of experience in identifying and avoiding the seven sins of thematic investing.
Common Implementation Mistakes in Long-Term Equity Strategies
We believe thematic investing offers investors a compelling opportunity to capture the most important structural changes of our time—but only if implementation is robust. The Lazard Global Thematic Equity team has honed its approach to long-term investing for decades, and we have learned through experience and close observation some of the mistakes investors can and do make.
In our companion paper, “Capturing Structural Change: A Guide to Thematic Investing,” we offered a comprehensive introduction to thematic investing, highlighting benefits in terms of return generation, risk mitigation, and sustainability integration. That paper also noted the importance of robust implementation. Over the years, we have identified many key implementation errors and, indeed, made a few of our own. Unfortunately, we see these errors playing out across the industry to this day, with potentially negative consequences for unwitting investors.
Many of the “thematic” investments available today are little more than slick marketing, in our view, and do not offer an opportunity to achieve excess returns over the long term. In this paper, we offer our insights as to how to identify and avoid implementation risks in thematic equity strategies. We provide suggested solutions, alongside a checklist of questions to ask managers to ascertain whether they are committing one of the seven sins of thematic investing.
In 2017, the Thinking Ahead Institute published a paper1 that detailed eight ways investors could create value over the long term, whether through enhanced returns or lower costs and loss mitigation. One of the potential sources of enhanced returns was thematic investing. The paper, however, noted the complexity of robust implementation.
Our decades of experience running thematic equity strategies lead us to heartily agree that investors can only realize the significant benefits of thematic investing if a strategy is implemented properly.
We have grouped potential mistakes into seven categories. This is not an exhaustive list and we focus only on certain aspects of thematic investment. There is a strong behavioral element to many of these mistakes because, in our view, human nature doesn’t change. In addition to documenting the problems we have seen, we offer our solutions to ensure a robust investment process and portfolio implementation, as well as a checklist of what to look for (and look out for) in a thematic strategy. Many of the observations here are equally applicable to other long-term equity approaches and even other asset classes.