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How to lower thematic risk and boost potential returns

How to lower thematic risk and boost potential returns

If you’re a thematic investor, you’ll be familiar with the burdens of extracting insights that can generate alpha. Shouldering the data collection and integration burden is one of the biggest killers of thematic performance.

In fact, efficiency is as big a factor in determining portfolio success as any asset allocation or stock picking process. Your ability to identify companies with the right exposures, seize market trend opportunities, and roll out more informed and better-performing products are all dictated by your process efficiencies.

Which is why thematic investing inefficiencies can pose a financial and even existential risk to Asset and Wealth Managers. Steven Yiu, founder of Blue Whale, puts it like this:

“There is a lot of career risk if you don’t have enough resources. The bulk of the UK active management industry does not devote enough personnel to stock picking and tends to hedge bets by having a large number of stocks in a portfolio. Lack of time to do extensive research makes fund managers reluctant to make bold calls.”

So, efficiency matters. A lot. And here’s the good news: things are changing. We’re seeing more and more technologies and approaches removing efficiency killers, one by one.

Let’s look at how and why researchers and portfolio managers can reduce risk, dial up thematic investment performance and boost customisation – all at the same time.

Capture higher-quality data

Thematic investing has become a popular way to supplement alpha-seeking portfolios. Market trends are best understood through a combination of quantitative, unstructured, and fundamental data points. As a result, research analysts are continuously trying to capture and integrate the latter two with the former.

That’s easier said than done in a constantly expanding universe of investment data—and gauging what data is truly relevant is a painstaking task—one that harms your ability to reduce risk, capture rewards and quickly roll out thematic products.

Plus, the more fast-paced an identified growth field is, or the further in the future it lies, the more uncertainty there is over whether an individual company is positioned to succeed in that field. So while it makes sense to bundle and invest in companies that could potentially benefit from a trend, portfolio managers are still held back by process inefficiencies, and risk over-weighting on a less appropriate asset.

With our Affinity platform, we’ve made it easy to filter and capture relevant market trends and themes – so portfolio managers can distil insights and underpin their equity analysis with reliable points of reference.

Affinity’s ThemeGraph also allows you to view your thematic exposures objectively and holistically in one place, meaning you can identify and mitigate any potential equity risks.

Cut through complexity

Evaluating these kinds of thematic portfolios is complex – the key for researchers isn’t only to consistently collect useful data—you also need to analyse all your data sets in a way that gives your investors relevant information to help drive their decisions.

Our Affinity platform uses AI to help screen and identify companies that have different levels of exposure to investment themes you care about. Simplifying how you judge whether an equity is suitable for your thematic portfolio drastically reduces the risk of compounding errors across your equity allocations.

You can also create thematic stock lists that can be regularly updated to help stay updated on the shifting market environment. This makes it far easier to consider each list of stocks in the context of your overall investment strategy.

See the whole picture

Thorough thematic analysis requires lots of quality, usable unstructured and qualitative data. And successful thematic investing also requires an active approach – meaning it’s crucial researchers and portfolio managers can make fast decisions in the context of wider market behaviours.

There’s another huge advantage to enabling a more active approach: active funds are in a better position to handle liquidity risk than ETFs, and can also better leverage thematic performance potential compared to passive index replicators, who need to factor in liquidity even more as a factor limiting equity selection.

ThemeScape – Affinity’s modelling desktop and UI – lets you capture qualitative, quantitative, and fundamental data in a single, consistent view to inform end-to-end portfolio builds.

As Affinity can provide more and more relevant equities already mapped to all other criteria, portfolio managers may apply their selection criteria to an even broader base of theme-relevant companies.

We designed Affinity to help Asset and Wealth Managers capture and ingest relevant data to inform high quality thematic insights. And to help you reduce risk and turbocharge your ability to act on market trends and generate alpha.

If you want to see how Affinity could work in your world, we should talk.

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