Investor Corner/The asset classes/Equity Concepts
2.1.17 Sector & Thematic Investing
Sector and thematic investing concentrates a portfolio in one industry, such as banking or IT, or one idea, such as electric vehicles. It offers higher potential return alongside a much higher risk of underperforming for extended periods.
Betting on a slice, not the whole market
A diversified equity fund spreads risk across many industries. A sector fund deliberately gives that diversification up in exchange for concentrated exposure to a single industry's fortunes. A thematic fund does something similar around an idea, such as clean energy or digital transformation, that may span several industries but shares a common story.
Why the extra risk is real
When a chosen sector or theme is in favour, concentrated exposure can significantly outperform the broader market. When it falls out of favour, which every sector and theme eventually does for some period, the same concentration works just as strongly in reverse. Sector and thematic funds have historically shown much wider swings in relative performance than diversified funds, in both directions.
A sensible role for these funds
Most planners suggest keeping sector and thematic exposure to a modest satellite portion of a portfolio, layered on top of a diversified core, rather than as the main engine of long-term wealth building. That way a single sector's bad multi-year stretch cannot derail the whole plan.
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