Thematic Investment on the Rise

August 10, 2021
Thematic Investment on the Rise

Building on the rising tide of interest in Asia, the growth of thematic investing has found strong appeal in the region. Thematic investing can be a great way of enhancing returns by adding a more active element to a core portfolio. 

To illustrate the benefits of this approach, also known as a core-satellite investing, we use our thematic and quantitative strategies based on US stocks – whose 3-year returns we show against the US equity market below

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We equally weighed all 17 strategies as a proxy for the actively managed satellite portion of the strategy without introducing any selection bias. We apply the core-satellite strategy to two types of investors: (1) HK equity investors (we use the Hang Seng index as a proxy), and (2) global multi-asset investors (we use a global diversified 60/40 equity/bond portfolio).

We allocate 10% of the broader portfolio to the satellite portion and 90% into either HK equity or the globally diversified portfolio. The portfolios are rebalanced back to these weights annually. We show the realized total returns during the period from February 2020 to February 2021 below.

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The core/satellite strategy improves the risk-adjusted returns of a globally diversified portfolio by 20%. Returns are higher by 3.5% while risk increases only marginally by 0.3% due to the diversification introduced by the thematic satellite. Similarly, the core/satellite strategy for HK equity investors improves risk-adjusted returns by 18%. Due to diversification and the strong performance of the US equity market, returns are 3.5% higher while risk decreases by 0.7%.