The deceptive allure of
investment themes
Clean energy. Electric vehicles. Robotics. Artificial intelligence (AI). Every few years, a new investment theme captures the market’s imagination. The opportunity appears enormous and the early winners often generate extraordinary returns, prompting investors to increase their exposure before it is ‘too late’. Yet identifying a winning trend is seldom enough. Successful investing requires getting three things right: the theme, the valuation and the timing.
The attraction of investment themes is easy to understand. Investing in a powerful trend can feel more tangible than owning a diversified portfolio of businesses across countries and industries. Investors can point to a technology, demographic shift or societal change and see how the future is taking shape.
Yet turning a compelling story into a good investment has proved surprisingly difficult. Many of the themes that dominate headlines genuinely reshape industries and consumer behaviour. Far fewer deliver attractive long-term returns for investors who arrive after the excitement has taken hold.
Investment research company Morningstar recently analysed the global thematic fund universe and reached a striking conclusion. Although these funds have periodically delivered spectacular gains, the long-term probability of choosing one that both survives and outperforms global equities has historically been very low. In fact, fewer than 10% have achieved both outcomes over longer periods.
Morningstar’s conclusion may appear counterintuitive. After all, many thematic funds are built around trends that have clearly succeeded. AI, cloud computing and digital commerce have transformed how businesses operate. Yet investment performance depends on far more than identifying the right trend. Investors must also consider valuation, competition, expectations and, perhaps most importantly, their own behaviour.
To assess how thematic investing has worked in practice, we analysed 28 thematic exchange-traded funds (ETFs) launched by Global X, one of the world’s largest specialist providers of thematic ETFs, each with a track record of more than five years. Looking solely at fund performance tells only part of the story, so we also examined money-weighted investor returns, measured using internal rates of return (IRRs), which estimate the returns experienced by investors in aggregate by taking account of the timing and size of cash flows into and out of each fund.
The broad picture is revealing. Broad global equities generated annualised returns of 12.7%. The average thematic ETF returned 4.9%, while the average investor earned only 1.5%. Put differently, investors not only lagged the global equity market by a considerable margin, but also earned substantially less than the thematic funds themselves.
The gap between fund and investor returns is where the behavioural element becomes impossible to ignore. Across the ETFs we analysed, investors earned roughly 3.4% less per year on average than the funds themselves. This suggests that many investors did not suffer because they identified the wrong trend, but because they invested at the wrong point in its lifecycle.
Human nature plays a significant role here. Investors are rarely attracted to themes when uncertainty is high and few people are paying attention. Interest tends to build only after strong returns have already occurred. Media coverage increases, analysts publish optimistic forecasts and stories of easy profits become widespread. As more investors embrace the idea, confidence grows. Unfortunately, markets seldom reward consensus thinking.
Several examples from our data illustrate this pattern clearly:
These examples are particularly interesting because the underlying stories are hardly irrational. Cybersecurity spending continues to grow, electronic payments are steadily gaining share from cash and electric vehicle adoption is likely to increase over time. Yet investors who bought in after enthusiasm had pushed valuations higher often earned little reward for backing these ideas.
The lesson is uncomfortable because it challenges a common assumption that identifying a winning trend is enough. In reality, successful investing requires getting three things right at the same time: the theme, the valuation and the timing.
History provides many similar examples. Railroads transformed transportation, airlines transformed travel, and the internet transformed commerce and communication. Yet investors who bought into these trends after excitement reached fever pitch often endured years of disappointing returns.
The problem wasn’t that the technologies failed, but that investors paid prices that assumed years of extraordinary success lay ahead. When expectations become too optimistic, even a successful industry can prove a disappointing investment.
Thematic funds are particularly vulnerable to this dynamic because many are launched after a trend has already attracted significant investor interest. Capital floods into the sector, competitors multiply and valuations climb. Future growth is no longer a pleasant surprise. It becomes an expectation that must be met and exceeded.
This doesn’t mean investors should avoid themes entirely. Structural changes can create important long-term investment opportunities, as new technologies, demographic shifts and changing consumer behaviour influence where future profits may emerge. What investors should avoid is confusing a promising theme with guaranteed investment success. A compelling story doesn’t remove the need for valuation discipline. In fact, when enthusiasm is highest, that discipline becomes even more important.
The evidence suggests that broad diversification remains one of the most reliable ways to capture the benefits of structural change without betting heavily on any single narrative. Successful trends often become part of mainstream equity markets over time, giving investors in diversified portfolios meaningful exposure without the concentration risk that thematic investing can introduce.
This approach influences how we build portfolios at Sanlam Private Wealth. We spend considerable time analysing long-term developments across the global economy and recognise that trends such as AI, digital infrastructure, healthcare innovation and ageing populations will shape future investment opportunities. Ignoring these developments would be a mistake.
At the same time, good investing requires a framework that extends beyond compelling narratives. Our process remains anchored in business quality, financial strength, valuation and risk management. We consider whether a company has a durable competitive advantage, whether management allocates capital wisely and whether the share price offers an attractive balance between opportunity and risk. This discipline helps prevent portfolios from becoming overly dependent on ideas that are already widely owned and fully priced by the market.
Capital preservation also remains a critical consideration. Themes can move rapidly from market favourites to disappointments as changes in interest rates, regulation, competition or investor sentiment alter the outlook. Concentrated thematic strategies can experience significantly greater volatility than diversified portfolios, increasing the risk of permanent capital loss for investors who enter at elevated valuations. By remaining mindful of structural changes while staying grounded in valuation, we aim to participate in long-term growth opportunities without losing sight of risk.
The market will always produce a new theme. Some will transform industries and a few may change the world. But recognising those changes doesn’t necessarily make them good investments. The historical evidence suggests that successful investing depends less on identifying the most exciting story than on maintaining discipline when enthusiasm takes hold. Over time, patience, valuation awareness and sensible diversification have proved more reliable than chasing whichever theme dominates the headlines.
