Thematic Investing Remains Popular Among Asian Investors
March 25, 2022 — Singapore
Long-term themes such as technology and sustainability will remain the key focus for higher returns
Thematic investing has gained traction among Asian investors during the pandemic, evident from the net inflows of US$19.8 billion and US$19.3 billion gathered in 2020 and 2021, respectively. Managers launched 112 sector equity funds domiciled within Asia in 2020, and another 198 such products in 2021.
In search of higher returns amid prolonged low interest rates, investors flocked to equity funds in 2021, especially thematic-focused investments. Within the region, equity funds achieved asset growth of 27.9%, the highest among all asset classes, and gathered net inflows of US$155.6 billion.
In fact, Asia-domiciled global large-cap equity funds posted positive monthly net inflows throughout 2021, which accumulated to US$42.8 billion.1 With the technology sector forming the largest constituent of the S&P 500, at 28.7% based on its January 2022 factsheet, it is unsurprising that a similar trend was spotted for technology sector equity funds, where positive monthly net inflows during the year aggregated US$13.3 billion.
However, the stickiness of investors in these funds remains a concern, and as thematic funds are typically used for shorter-term bets, this runs the risk of investors booking profits after gains. Furthermore, returns slipped in 2021—for instance, technology sector equity funds in the region saw median yearly returns plummeting from 47.1% in 2020 to 9.3% in 2021. There was a similar trend with healthcare sector equity fund—median yearly returns dropped from 23.9% to 1.2% over the same period.
That said, Cerulli anticipates that investors will continue to show interest in thematic investing, particularly for themes focusing on long-term structural changes such as technology, healthcare, and sustainability. For environmental, social, and governance (ESG)-related themes, Cerulli has noted the popularity of sub-themes such as climate change, electric vehicles, and clean energy.
With the active push for net-zero transition by 2050 under the Paris Agreement, more Asian markets are following their European counterparts in developing their green finance sectors and guidelines to standardize and align environmental risk measures and disclosures to the local context. In markets such as Taiwan, Hong Kong, and Singapore, managers are now required to provide detailed disclosures of their ESG risk measures, methodologies, and outcomes.
Following political and regulatory tailwinds, managers in Asia are increasing their efforts to integrate ESG in their investment processes, especially from a risk management standpoint. Distributors are keen to onboard ESG products to their shelves, with some private banks and robo-advisory platforms curating ESG-related portfolios for their target investors. In addition, local managers in emerging Asian markets such as Malaysia and Thailand have been heavily relying on global managers via subadvisory partnerships to roll out ESG-related products to investors.
Cerulli expects thematic investing to regain its momentum in 2022, riding on megatrends such as technology, healthcare, consumer discretionary, and sustainability. “It is also important to bear in mind that product innovation and investor education will go hand in hand to ensure steady traction in thematic strategies over the longer term,” said Jaslyn Ong, research analyst. “In the meantime, investors are likely to seek safer bets in mixed-asset strategies to reap the upside potential with downside protection.”
1 Source: Morningstar
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