Global thematic funds are facing heavy outflows this year as investors’ fascination fade with such assets, most of which are closely correlated with economic growth.
Investors had piled into such funds over the past couple of years as they allocated money to high-growth sectors and stocks tied to trending themes such as work-from-home, climate change and artificial intelligence.
However, growth stocks have slumped this year, due to a rapid rise in interest rates around the world, and that has reduced the demand for thematic funds.
According to Morningstar, thematic funds witnessed a record outflow of $6.3 billion in the first half of this year, compared with an inflow of $142.9 billion in the same period last year.
Their net assets also dropped to $616.9 billion at the end of June, a 24% drop over the past year.
These declines have prompted fund houses to launch just 65 thematic funds in the first half of this year, compared with a record 234 in the same period last year.
“Thematic funds are known to be among the most risky categories of mutual funds, in part because it restricts the opportunities available. It prohibits the fund from investing in stocks that are not related to the theme,” said Richard Gardner, chief executive officer at financial services firm Modulus Global.
“In a bear market, investors tend to be incredibly risk averse. So, it is only natural that thematic funds would see lessened interest.”
The ETF All-Stars Thematic Composite index (.TCASX), which consists of stocks that align with popular themes such as fintech, sustainability and healthcare innovation, has declined 28.76% this year, compared with the MSCI World index’s (.MIWO00000PUS) fall of 15%.
The Global Robotics Automation index ETF has slumped 26.84% this year, after delivering an average return of 30% in the last three years.
Global cannabis stocks tracker MJ ETF has fallen 46.8% this year.
The Morningstar data showed robotics and automation funds faced $1.6 billion worth of outflows in the first half of this year, while fintech and digital economy funds had net sales of about $1.3 billion each.
The net assets of cannabis funds declined to $1.3 billion at the end of June, a 68% drop over last year, while the assets of fintech funds dropped to $8.6 billion, a 60% decline.
Though thematic funds are lucrative investments, investors often tend to pile into them after their initial big run-ups, exiting at losses, some analysts said.
“Since every theme focuses on different aspects, it is possible that some have already lived their time,” said Kunal Sawhney, CEO at independent research firm Kalkine.
A Morningstar report showed that over the past 10 years, nearly 60% of U.S. thematic funds had shuttered, and just 22% survived and outperformed the broader global markets index.
“In 2021, more than two thirds of thematic funds underperformed the Morningstar Global Markets Index,” Morningstar said. “This is a sharp reversal from their stellar showing in 2020, highlighting the volatility that goes hand in hand with thematic investing.”