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Thematic indices

11 Dec 2018

Thematic indicesThree questions to Inderpal Gujral, Head of Product at STOXX

Thematic investing has gained momentum in recent years.  It tries to be forward-looking and predictive. Inderpal Gujral, Head of Product at STOXX, explains how thematic investing works, what the most important themes are and how STOXX designs thematic indices.

Inderpal, what is thematic investing?

Inderpal Gujral, Head of Product, Stoxx Limited

Thematic investing attempts to capitalise on broad, disruptive, compelling and often hard-to-predict trends that are changing our society. Their growth characteristics have the potential to significantly outpace the market’s average rates, and indeed this has been the case in the last few years for many if not most of the concepts we track at STOXX. The fast-advancing and changing world we live in has been a fertile background for these strong trends to emerge.

What are the most important themes?

We currently see three interesting broad thematic “megatrends”, as we call them: demographics, climate change and technology. From these megatrends, we then narrow down to several large cross-industry concepts with long-term economic impact. An example for demographics would be an ageing population, or urbanisation.  Climate change encompasses themes like renewable energy and resource scarcity. And technology includes artificial intelligence (AI), blockchain and fintechs. Each of the thematic concepts on its own has the potential to be a fantastic growth and transformation story, with social and economic consequences. Identifying these concepts is the starting point from which to create a portfolio that can leverage growth and replicability.

How does STOXX design a thematic index?

At STOXX we have identified concepts that are investable using a passive methodology that observes principles of replicability and liquidity as it is the case with all of our indices. The thematic concepts must be appropriately chosen considering their scope and durability, and to avoid fads.

We have taken two main approaches in the design of our thematic indices. Firstly, there is a revenue-based approach, where we consider each company’s balance sheet exposure to pre-defined sectors associated with a given concept. This approach enables us to isolate specific concepts and provide pure exposure to a thematic megatrend. And, secondly, we have used an innovative AI-based approach, where we use sophisticated machine learning and computational linguistics technology to analyse the filing of patents in order to select the constituents of indices. We currently use this concept for two indices: one on AI and one on blockchain.

Given the dynamic pace at which our society is changing, we are always considering new thematic indices as we continue to exploit the possibilities that these megatrends offer.

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