The Takeaway
Morningstar Indexes requires that a theme meet a series of standards in order to be included as a thematic index fund, including representation of a trend with potential to persist for a minimum of 10 years and establishment of a clear economic foundation to accurately assess the company
Through consistent monitoring of the investment landscape for relevant and emerging themes, as well as maintenance of all currently included themes, the Morningstar Indexes framework continues to provide superior analysis and identification of secular trends with significant long-term potential.
Demand for thematic investment solutions has skyrocketed in recent years, spurring the launch of a record 589 new thematic funds globally in 2021, up from the previous record of 271 in 2020. Assets under management in these funds grew to just over $800 billion by year-end 2021, a nearly threefold increase in just three years' time. These funds promise concentrated exposure to new and exciting themes, drawing investor interest from retail investors to financial professionals alike. Like a new car off the lot with a fresh coat of paint, these funds are designed to turn heads. However, if investors were to take a closer look at their holdings and construction methodologies, they'd frequently come away disappointed by what lies under the hood.
Building on the comprehensive research of the Morningstar Manager Research team in their most recent "Global Thematic Funds Landscape" report, the Morningstar Equity Research team has conducted a thorough analysis of many leading thematic funds. Most fail to deliver the concentrated thematic exposure that they promise. All too often, these funds include companies with only tangential exposure to a give theme. Investors might be surprised to learn that many thematic funds are constructed using automated keyword searches through regulatory filings. The more often a company uses a given keyword or phrase related to a targeted theme, the more likely it is to be include din an associated thematic fund. However, this light-touch approach can lead to the inclusion of companies with as little as 1% or less of its overall revenue tied to the targeted theme. After all, companies are eager to highlight any exposure they might have to an emerging, high-growth trend, even if that exposure is immaterial.
Investors deserve better—and Morningstar is in a unique position to empower investor success via its suite of thematic indexes supported by the insights of the Equity Research team. Drawing upon the in-depth expertise and forward-looking research of Morningstar's 100+ research analysts, Morningstar Indexes delivers unparalleled thematic purity across a range of durable themes, holding companies to a higher standard than conventional approaches. With impressive demand growth for thematic funds likely to persist, the value proposition associated with Morningstar thematic indexes is clear.
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