Investment Strategy
Jun 10, 2024
Three keys to better thematic investing
We see thematic investing as an essential component clients can incorporate into their long-term investment strategy.
Amanda Lott, Head of Wealth Planning and Innovation, J.P. Morgan Private Bank
Sarah Backer, Wealth Planning and Innovation Associate, J.P. Morgan Private Bank
Jake Manoukian, Global Investment Strategist, J.P. Morgan Private Bank
We’re always on the lookout for long-lasting macroeconomic trends and patterns that could drive public and private investment over the long haul. These shifts are hugely consequential, yet they’re often underappreciated in their early stages. Only later is their potential for sustained above market returns more broadly recognized.
This is the potential of thematic investing. You may have heard that phrase used in different ways. To us, it means investing in long-term trends with near-term catalysts that can play out across geographies, economic cycles and sectors.
Investing in these transformative moments can be an integral component of a diversified strategy that helps you reach your goals. Spreading a portion of your portfolio across multiple themes can reduce risks and be an effective hedge against inflation. Many investors also find thematic investing not only financially rewarding, but also personally fulfilling, as it aligns with their interests and keeps them engaged with market developments.
Investors sometimes get led astray by splashy-sounding market fads that don’t live up to their hype. In our view, a well-chosen investing theme is something different: It’s a fundamentally grounded shift in the direction of business or the economy. It’s not a promise of a coming revolution. It’s a change that is already underway.
Today, we focus on significant potential in two themes: security and infrastructure. These themes may seem familiar to experienced investors, but that confirms their durability. In our view, they are neither priced in nor played out.
Why security and infrastructure intrigue us today
Security
Amid rising geopolitical tensions, nations are bolstering their investments in security. They’re protecting their food and energy supplies, safeguarding manufacturing capabilities through shifts such as nearshoring, and investing in cybersecurity and traditional defense.
Infrastructure
Infrastructure is an enormous sector that spans all the way from bridges and airports (traditional infrastructure) to power generation and pipelines (energy infrastructure), to data centers and fiber (digital infrastructure). Just as ports, railroads and bridges are integral to the trade of goods, computing and wireless connectivity are integral to the modern economy.
If we continue using Chat GPT at the pace we are now, we run out of computing power before end of next year.
Here are three key considerations to keep in mind when incorporating thematic investing strategies into your portfolio.
Consideration 1
What your goals are
Consideration 2
How you invest
Consideration 3
When to act
1. Your goals and time horizons matter
Once you’ve identified your wealth goals, you’ll want to align your resources and strategic allocations with those objectives. An investor can achieve this by segmenting their portfolio into different buckets, each aligned with specific goals. Each bucket has its own strategic allocation, risk tolerance and time horizon. Thematic investing can be integrated as a tactical component within each bucket, choosing the right investment vehicle and amount to match its objectives. This allows you to invest in timely opportunities while still aligning with your goals’ specific risk, time and liquidity needs.
We view the security theme as a long-term one, which can be suitable for clients investing over long timelines or for future generations. In our view, infrastructure investments should be grouped with core equity exposure because of the consistent returns they can potentially deliver—although short-term opportunities can arise.
2. Balancing public and private investments
When it comes to how you choose to invest, we typically advise clients to take a thoughtfully diversified approach. It’s important to match your time horizon and liquidity needs to the type of investment you choose.
Private equity generally offers greater potential returns to qualified investors1 than public markets. Private markets also tend to move in different patterns than exchange-listed public market equities and other asset classes (they’re not correlated). Private markets may be a good approach to consider for digital infrastructure and in assets you don’t need to spend from today.
There are trade-offs associated with private market investment—specifically reduced liquidity and higher risk. On the other hand, public markets have easily accessible opportunities for investment and greater liquidity amid slightly lower returns. If you are looking to invest in security themes, consider public equities. For traditional infrastructure investments, fixed income through government bonds that support infrastructure projects can also be an option for U.S. investors, while offshore private infrastructure funds may be appropriate for non-U.S. investors.
3. When to act
Even if a trend appears well positioned for the long term, we feel it’s important for clients to stay actively engaged. This means you should periodically review and adjust your portfolio to maintain the desired asset allocation, and should stay flexible to act when tactical opportunities arise.
As we expect security and infrastructure to be durable trends for at least the next decade, in your next portfolio review, look to see how these themes can fit with your overall wealth plan.
We can help
At J.P. Morgan, our team can provide personalized advice and tailored investment strategies to help you navigate the world of thematic investing. If you want to learn more about our views on these themes or how to invest in them in a way that meets your needs and goals, we are here to help.
Contact your J.P. Morgan team to learn more.
1A qualified client has investable assets of $2.1 million+ or $1 million+ invested with a specific advisor.
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