Can Robo Advisory create thematic investing strategies?
Thematic investing is gaining popularity due to its ability to align with personal values, capture long-term growth potential, provide diversification, access innovative companies, and capitalize on emerging social and economic trends. As investors seek to go beyond traditional market indices and express their beliefs and interests through their investments, thematic investing offers a compelling and differentiated approach to portfolio construction.
Thematic investing involves selecting investments based on specific themes or trends, such as renewable energy, artificial intelligence, cybersecurity, or healthcare innovation. Robo-advisors (RAs), automatic investment platforms that use algorithms and technology to provide investment advice, can easily incorporate thematic investing into their strategies. RAs are built to automate portfolio diversification at minimal cost, which they achieve by seamlessly scouting the market for well-performing stocks through historical trend analysis.
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RAs have been dubbed as revolutionary by some people, but they’re more like an evolutionary process of automating investment plan in a phased manner. It has not reached its epitome, but with more data, improvements in AI, and better ML logic, it is increasingly becoming the force of change in the financial markets.
This article discusses the effectiveness of RAs in thematic investment strategizing and sheds light on their suitability for investors.
How do RAs formulate thematic investing strategies?
It’s worth noting that the availability and sophistication of thematic investing strategies may vary among different robo-advisory platforms. Some RAs may offer a selection of pre-defined thematic portfolios, while others may allow customization and flexibility for investors to create thematic strategies. Thematic investments have risen post Covid-19 and the top themes have captured 25% of US equity market returns over the past four years.
Investors interested in thematic investing should research and evaluate the offerings of different RAs to find a platform that aligns with their specific thematic preferences, investment goals, and risk tolerance.
Let us look at how RAs are well suited to form thematic portfolios.
- Theme Selection
RAs can conduct research and identify popular or emerging themes that align with market trends and investor interests. They can analyze industry reports, news, and data to determine themes with growth potential and long-term viability.
- Portfolio Construction
Based on the selected themes, RAs can construct digital investment portfolios that include companies or assets related to those themes. They can use algorithms to determine the appropriate asset allocation within the portfolio, considering factors such as risk tolerance, time horizon, and investment goals.
- Diversification
RAs emphasize the importance of diversification, even within thematic investing strategies. They can ensure that the portfolio comprises a mix of companies or assets within the chosen theme to spread risk and reduce exposure to any single investment.
- Automation and Rebalancing
Robo-advisory platforms automate the investment process, including portfolio rebalancing. They continuously monitor the performance of the digital investments within the thematic strategy and make adjustments as needed to maintain the desired asset allocation and risk profile.
- Tracking and Analysis
RAs can track the performance of the thematic investing strategy over time. They provide investors with data and reports to evaluate the progress and effectiveness of the chosen theme, allowing them to make informed decisions.
Who Should Opt for Robo Advisory for Thematic Investing?
Leveraging economic trends is foundational to building a thematic portfolio. Exposure to trends prevents investors’ FOMO and keeps investor morale high through better-than-market returns.
RAs are computer algorithms that are built to perform analysis without the behavioral biases that tend to grip retail investors. These algorithms are not yet self-sufficient, making the need for prompts indispensable. The humanoid nature of decision-making dictates that we deploy RAs for conducting thorough market research, given a pre-defined rationale. This ensures no stone is left unturned and the best available investment avenues are selected to maximize returns.
Designing optimal robo-advisory services helps mitigate decision inertia, one of the most significant barriers to booking profits in financial markets. The more behavioral economics insights are provided to RAs, the more they can enrich investment behavior. A University of Goettingen study found that RAs tend to go a little wild when left unsupervised. They tend to defy a certain simplicity that comes naturally to humans. For example, a short horizon portfolio might include a high number of equities, rendering it highly prone to fluctuation. Despite being an adequately liquid portfolio, it might not be sufficiently safe.
Building on the seeming drawback of robo advisory, algorithms can be dexterous beyond risk profile considerations. RAs in the current state find it difficult to truly understand an investor’s financial situation because of amateur screening via small questionnaires. An in depth robo review narrates the requirement for tech-savvy investors to give it a little head start. This can be done by defining certain things proactively, such as diversification across time horizons and product preferences. Basically, RA managing a thematic portfolio is suitable for an investor with a sound understanding of financial markets. Investors can be more efficient in their investment performance with the help of RAs, as they offer a beta-stage tool for more sophisticated investing. As the trends could have varying horizons and strengths, leaving those calculations to the algorithm saves a lot of time and effort.
How will improvements in RA attract future-ready investors?
Robo-advice can put your investment portfolio on track by augmenting your financial strategy, whether you aim to increase your retirement income or pursue a more specific goal. Thematic investing will be RA’s forte in the years to come, given their increasing effectiveness at investor profiling through the effective implementation of big data analytics, AI, and even psychometrics. This is how the investor profile will become more holistic to include risk appetite and choices such as investment objective, financial situation, and attitudes.
Thematic investment strategies can be automated by syncing the investor profile with market trends that align with them. So, merely understanding the investor’s needs is insufficient unless the investing strategies deployed are not targeted to satisfy their psyche. The saying can support this argument, “Needs are the basic requirements of life, while wants are about preferences in life.” These wants are defined by one’s belief system, which is also reflected in the industries one supports. And this is how a prudent investor should invest; by putting money into the products and services they use. Companies with such offerings are highly likely to flourish and succeed, thereby enhancing their share prices.
Thematic investing is, therefore, a forward-looking strategy that does not bind itself to past performances. More often than not, it involves start-ups tapping into potential growth industries to create excellent value for themselves and their customers. As investors, RAs can help you tap these understated opportunities with just a little direction from your preferences. Although there can never be assured returns in the financial markets, the possibilities of focused investments based on recognizable trends are enormous.
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- What is thematic investing in Robo Advisory?
Thematic investing involves targeting specific sectors, trends, or themes, which Robo Advisors can automate based on user preferences. - Can Robo Advisors customize thematic investing strategies?
Yes, many Robo Advisors offer customizable options to create thematic strategies aligned with individual interests and market trends. - How do Robo Advisors implement thematic investing?
Robo Advisors use algorithms to select investments that align with specific themes, such as technology, green energy, or healthcare. - Is thematic investing through Robo Advisory suitable for all investors?
Thematic investing via Robo Advisory can be a good option for investors focused on specific industries, but it may not suit those seeking broader diversification.