A close look at criticism
However, themed funds are often criticised for their increased fluctuations in value. Investors in thematic investments are aware that they are more susceptible to short-term cycles, depending on whether the topic is currently in vogue in social or political discourse or is being penalised. Nevertheless, in the long term, promising themes follow an overarching trend that drives the innovative power of many themes and offers attractive growth opportunities. Holistic risk management is essential to control the volatility of active theme funds. The goal is to balance the utilization of thematic growth potential with the management of associated risks. Active theme funds can target long-term capital growth while mitigating potential risks through structured theme definition, diversified portfolio construction, ongoing security selection monitoring, and stress tests and scenario analyses.
Another point of criticism is unfulfilled performance expectations. It is worth noting that investment behaviour itself is not always conducive to performance, which is often overlooked. The figure below illustrates the difference between the time-weighted return (TWRR) and the money-weighted return (MWRR) of the 'Green Transition' theme (with reference currency USD), which is a more accurate representation of the success achieved by investors in reality. The outcome is remarkable. Although the theme has generated a positive annualised return of over 3% in the past five years, the money-weighted return indicates that the average amount invested in the fund has lost more than 4% per annum. This difference highlights that investors frequently enter the market after a period of good performance and then participate in the correction on average. Investment themes in the equity market often exhibit cyclical behaviour, with investment hypes followed by corresponding counter-movements.