Despite headwinds against niche strategies, mainstream equity vehicles more likely to be shut down, Morningstar reports
Despite the fact that they are frequently written off as gimmicky fads, niche thematic funds are proven to be more robust than more mainstream funds.
An analysis by Morningstar showed the theme-focused funds have greater survival rates than traditional equities funds, which are more likely to be shut down, reported the Financial Times. The niche strategies invest in everything from clean energy and artificial intelligence to robotics and the metaverse.
Even with their inclination toward technology and other growth stocks often translating into larger losses, they have experienced proportionately stronger inflows this year than more mainstream equity funds, despite their total assets declining from a peak of US$849 billion at the end of last year to US$618 billion as of June 30.
The results directly contradict the widely held belief that thematic funds are only made to entice retail investors when a certain narrative is trending but unlikely to provide attractive long-term returns.
Read more: Are thematic ETFs the 'junk food' of investing?
The long-term survival rate of stock market-based thematic funds, at least in comparison to equity funds in general, was the study's most surprising discovery.
According to a widely held belief, thematic funds are intended to be trendy. Therefore, when the trend becomes unfashionable, they are likely to experience big withdrawals, be closed down, and be replaced by something newer and brighter.
Furthermore, it is widely believed in the business that many of these funds were started on a speculative basis and will never grow large enough to be commercially sustainable, forcing their sponsor to terminate them early.
Both perceptions are supported by some evidence that Morningstar discovered.
Over three-quarters of closed thematic funds globally never achieved US$100 million, with two-thirds not even reaching US$50 million at their apex.
Looking at fund survival rates, only 49.9% of the thematic funds issued 15 years ago are still available. Survivorship improves to 62.4% for those trading 10 years ago, and 90.6% for those that launched as little as three years ago.
Read more: Have thematic ETFs silenced the skeptics?
But during every timeframe reviewed by Morningstar—one, three, five, 10 and 15 years—non-thematic equities funds have closed at a still quicker pace than thematic ones
Since mid-year, the share of thematic funds in total equity fund assets has stayed constant or even increased, coming in at 2.2% as of June, thrice what it was in 2012.
Flows had remained resilient, according to Peter Sleep, senior portfolio manager at 7 Investment Management. However, he was skeptical about the idea that thematic funds would continue to outlive equity vehicles in general.
“We are just at the end of a bull market for growth. I’m going to put a lot of money on it that the conclusion in 18 months’ time will be very different,” he told the Times.
