In a solutions-based world we compete against many alternative ways to invest sustainably. Themed funds are one such way. They benefit from simple concepts, such as solving the world’s water problems or harnessing the power of the wind or the sun.
These ideas sound good, look good and feel good. But are they any good? No.
Firstly, these funds rarely do what they say they do. The idea of a water fund, for example, can be very different from the reality of the companies you are actually investing in, which could well be manufacturers of expensive taps for luxury homes.
Secondly, with such a limited range of options thematic funds tend to back the losers as well as the winners. Over time, returns between each stock within any theme will vary widely depending on stock specifics. That’s no good if you hold them all.
Thirdly, the lack of options within any particular theme means managers can end-up shoehorning ideas into the funds which can either be bad investments or questionable in terms of thematic exposure (thereby diluting their exposure to the actual theme).
Fourthly, there’s the law of unintended consequences. Thematic funds deliver unplanned factor risks that drown-out stock-picking and are often contradictory to the intended theme.
We think that thematic funds are a lazy and flawed proxy for sustainable investing. They offer a simplistic ideology which delivers ‘green-washing’ by stealth, while falsely claiming to be ‘pure’.
We believe that sustainable investing is greenest from the bottom-up – that means focusing on stocks.
Author: Craig Bonthron, Co-manager of Kames Global Sustainable Equity Fund
For Professional Investors only and not to be distributed to or relied upon by retail clients. Opinions expressed represent our understanding of the current and historical positions of the market and are not an investment recommendation or advice. Any securities and related trading strategies referenced may or may not be held/used in any strategy/portfolio. Any Opinions and/or example trades/securities are only present for the purposes of promoting Kames Capital’s investment management capabilities. Sources, both internal and external, used are deemed reliable by Kames Capital at the time of writing.
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