Transform thematic investing leveraging AI

Prologue

The thematic investing allows clients to invest in long-term ideas and trends and enables them to capture potential opportunities emerging due to economic, technological, and social changes. Broadly, the thematic investment classified as disruptive (OpenAI, autonomous driving), megatrends (demographic shift, resources scarcity) sustainable (environment, governance), differentiated insights (founder led company, focused stocks) and outcome-oriented (lower volatility of returns, reduce the impact of market downside). An investor can opt for thematic investing using variety of options, such as mutual funds, exchange-traded funds (ETFs), or individual stocks.

According to a leading industry report, the thematic investment predicted to grow significantly in the next three years. The research also suggests that more than 80% of investors are aware of thematic investment, indicating that it has become more mainstream now. This growth driven by investors’ expectation to improve investment returns and desire to achieve a positive impact.

Current situation

Thematic investing is more of a top to down investment approach that heavily relies on the extensive research to explore macroeconomic, geopolitical, and technological trends. It includes long-term, structural shifts arising from newly emerging business models, disruptive technologies and changing consumer demographic and behaviour. Thematic investing is a future focused around specific trends that expected to mature over time. The key objective here is to identify companies well positioned to benefits from these trends and provide higher returns to investors.

For example, in November 2023, eToro had launched extreme weather investment portfolio (XtremeWeather) for retail investors. It comprises of thirty stocks from key industries such as renewable electricity, industrial machinery, supplies and components, fertilizers and agricultural chemicals, retail home improvement, electrical components and equipment, and gas.

Firms spends lot of effort and resources for identifying new themes and creating investment offerings aligned to client’s goals and values. The traditional firms have still not fully harnessed the technology capabilities and uses semi-automated solution to offer thematic investing. Firms must develop next-generation solution using the advanced technologies such as cloud computing, artificial intelligence to drive its growth and transformation agenda.

Industry use cases

A select AI initiatives taken up in this arena by the leading firms discussed here for reference.

• Charles Schwab offering thematic stock lists to self-directed clients who want to invest in stocks aligned with their personal interests and values. It contains forty-five different thematic categories and approximately nine hundred companies encompassing a range of trends including data advancement, medical breakthroughs, and environmental innovation. Clients can access the Schwab’s thematic stock lists via mobile app or online portal with no additional fee. Schwab had developed a sophisticated proprietary algorithm that allows clients access to dozens of investing themes. It leverages natural language processing (NLP) to mine terabytes of data and millions of public documents, such as patent grants, clinical trials, and regulatory filings to objectively identify publicly traded companies based on their relevance to a particular investment theme. The algorithm can quickly ingest large documents and identify thematic correlation.

• Moneyfarm, the leading European digital investment advisor (robo platform) launched new range of thematic portfolios. It allows client to invest in megatrends that are characterizing the economy. The options include, technological innovation, demographic and social changes, sustainability. Moneyfarm periodically screen the markets leveraging machine learning and identify suitable ETF. Moneyfarm has adopted a core-satellite allocation approach to minimize investment risk.

• Nutmeg, the UK based digital wealth manager has launched its thematic investment portfolios. The three portfolios, which charges a management fee of 0.75% on the first £100,000 invested and 0.35% thereafter, will focus on technological innovation, resource transformation and evolving customer.

• TIFIN and J.P. Morgan launched TIFIN.AI to accelerate thematic AI-powered innovation. The platform aims to provide B2B AI assistants for better wealth outcomes.

• VettaFi the indexing, data, and research firm has acquired EQM Indexes, one of the most innovative providers of custom thematic index solutions to the ETF industry. As result of this acquisition VettaFi family of indexes now powers $19 billion in ETFs, including direct indexing solutions, another area where EQM has strong capabilities.

Emergence of GenAI in thematic investing

Firms must explore generative AI to modernize thematic investing. Specially, the content summarisation capability that allows to process the high volume of information in an efficient manner. Firms must equip research analysts with a digital assistant that enabled to traverse through the enterprise knowledge base and external resources to look for emerging themes. It must have an ability to drill down and analyse the specific themes for example, identify niche companies, stock performance, financial statements.

Augmenting generative AI capabilities with human intelligence will not only bring efficiency but also allow to discover entirely new micro themes that could have been missed during manual scanning. And will have an ability to provide more holistic view by gathering data from multiple sources and processing & presenting it in a meaningful manner which is one of the most challenging tasks when performed manually.

Firms must enrich the digital experience by improvising the client journeys and providing a seamless experience to access the thematic investments. Firms must improve the client engagement by building virtual digital assistants that allows them to know more about the specific thematic investment options offering.

Personalised client communication over the preferred digital channel will play a significant role here. Firms must upgrade its ability to effectively communicate and create awareness about the emerging new themes to the targeted client and nudge them for channelising additional investments. Firms must generate this recommendation based on the client's goals, values, and historic thematic investment. For example, client invested in semiconductors may also consider ‘AI enabled chips’ micro theme for investment.

Firms shall embark upon a transformation journey based on its strategic business and technology priorities and build a roadmap to modernise the thematic investing.

Conclusion

Firms must consider generative AI to scale its thematic offerings, as it helps to improvise the customer satisfaction by delivering best-in-class personalised thematic investment options across the distinct categories at an affordable cost and lower investment threshold. It will allow to bring cost efficiency and process effectiveness by reducing the manual effort spent by research team in identifying new themes. It will enable firms to launch the new thematic investment solution much faster and will provide a competitive advantage and drive business growth by delivering superior customer experience.

Reference

• https://institutional.fidelity.com/app/proxy/content?literatureURL=/9897007.PDF
• https://mediaroom-en.bnpparibas-am.com/news/bnp-paribas-research-shows-thematic-investment-predicted-to-grow-significantly-in-the-next-three-years-4b1b-0fb7a.html
• https://www.schwab.com/learn/story/what-is-thematic-investing
• https://pressroom.aboutschwab.com/press-releases/press-release/2022/Schwabs-New-Thematic-Stock-Lists-Make-It-Easier-for-Individuals-to-Invest-According-to-Their-Interests-and-Values/
• https://www.finextra.com/pressarticle/96130/moneyfarm-launches-thematic-investing-portfolios/wealth
• https://www.wealthprofessional.ca/investments/etfs/vettafi-acquisition-will-enhance-indexing-capabilities-for-asset-managers/379573
• https://www.finextra.com/pressarticle/98900/etoro-launches-extreme-weather-investment-portfolio/wealth
• https://www.privatebankerinternational.com/news/nutmeg-announces-thematic-investment-portfolios/