This is Why Your Thematic Fund Leaves You Empty-Handed

VIDEO: You can pick the right fund and theme, but buying and selling at the wrong time could be detrimental, Morningstar's Kenneth Lamont explains

Johanna Englundh 16 November, 2023 | 9:51AM
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Johanna Englundh: A recent study from Morningstar shows that investors are usually quite bad at timing the market, leading to a gap in their return compared to the fund's total return. And thematic funds seem to be one area where investors struggle the most. Kenneth Lamont, senior analyst for passive strategies at Morningstar, is here with me today to dive deeper into this.

Kenneth, why do you think investors struggle so much when it comes to thematic funds?

Kenneth Lamont: Well, there are two parts to this. One is that thematic funds tend to be more volatile in general, which exacerbates bad decisions. And buying at the top and selling at the bottom is really exacerbated if there's a higher level of volatility. And more generally, when it comes to thematics, there is an inbuilt story and sometimes it's connected with an emerging technology, such as AI. And there can be a hype cycle. So, there's sort of a buildup and then there's a fall. And unfortunately, funds tend to take some time to come to market. So, often they're launched at the top of that hype cycle. So many investors jumping in, they may be jumping in perhaps too late.

Englundh: So, when you conducted this study, did you find any specific themes to stand out?

Lamont: Yes, some may not surprise. The technology themes, within that you may have poster children, such as ARKK, which have been very, very highly volatile, stand out. But some might surprise on the other side too. So alternative energy ETFs, so the iShares Clean Energy ETFs, both in Europe and in the US, have been some of the largest culprits as well. And this is really because what we've seen is a huge inflow at one particular time and then you've seen a real drop away in performance. So, the average dollar, the average investor really invested at the top of the market and has really suffered most of those falls afterwards.

Englundh: So, I'm quite intrigued by this energy transition theme. It's a highly topical area, but as you say, then it's quite challenging for investors. Why do you think that is?

Lamont: Well, again, it comes down to volatility. In the case of energy transition, you really had a wall of money flowing in about the time of Joe Biden's election in the US. And this was related to the potential subsidies that were expected or did flow and support alternative energy investments in the US. But again, most of the investors into those funds, all they really got because they came towards the top of the market was the subsequent fall in value. So, this isn't to say it's not going to be a good long-term investment, but certainly over the last five years, that's really stung investors in these particular funds and in energy transition funds in general.

Englundh: So, if investors continue to time themes like energy transition or technology badly, do you think that there's a risk that the interest will eventually die out?

Lamont: Well, it's a great question. I think the whole thematic fund industry will suffer if investors continue to use funds in this way. And I think there's a burden on both us as Morningstar but also other participants in the industry. So, the asset managers themselves through to certain intermediaries to really emphasise this. It's a win-win situation here if we all improve the end experience for the investor. I really think that thematic investing is a valid way of viewing your investments. But really, there's an education gap as well, which needs to be closed to really help investors better use the products that are already out there. But it really just goes to show that you can have the right theme, you can have the right fund, but if you're not really using it correctly, then you can really still end up empty-handed.

Englundh: So, with that said, thank you so much, Kenneth, for joining us today. And until next time, I'm Johanna Englundh for Morningstar.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Johanna Englundh  Johanna Englundh is an editor for Morningstar in Sweden 

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