What have been the big thematic ideas in India in the last 25 years. Obviously, the arbitrage offered by pharma and IT in the 1990s have been big themes. Not surprisingly, they have outperformed other sectoral themes in the last 20 years. Consumer driven stocks have been another big theme in India. That is hardly surprising with a growing middle class and rising propensity to consume among the rural and urban masses. Looking ahead, AI and Robotics could be big long term themes while affordable housing and insurance could be great short to medium themes. Thematic investing in India is all about identifying such big themes and allocating a portion of your portfolio into such themes. Before getting into specific thematic investment ideas, let us first understand the benefits of thematic investing.
The best of global investors like Warren Buffett and Peter Lynch have eloquently proved that the best way to create wealth in the long run is through focused themes that have a strong logic and strong profit generation potential. While your core portfolio can still be a diversified portfolio, you can allocate about 15-20% of your portfolio monies to sustainable long term themes. This will help you gradually create a more high-powered portfolio.
If you look back at the performance of thematic stocks versus the index during their thematic period, then it is a clear case of outperformance. Take Infosys and Wipro during the late 1990s; take capital goods and power companies in the mid-2000s; take private banks in the last 5 years; take FMCG in the last 1 year. These are all cases of specific themes vastly outperforming the index by a huge margin. That is what you need to add pep to your portfolio.
The normal argument against thematic investing is that it is too risky. That is where your management of risk comes in handy. For example if IT is a theme then a stock like TCS could be a conservative way to play the theme while a mid-cap IT stock will be a more aggressive way to play the theme. The crux of the story is that even within themes you have the facility to classify stocks into high risk, medium risk and low risk.
As mentioned earlier, themes that sustain over a period of time can actually outperform the diversified equity funds. So, even shifting 10-15% of your long term portfolio into specific themes can make a big difference to your portfolio returns in the long run. Thematic investing is not a shift in strategy. Your core strategy is still a diversified approach but themes will add the outperformance to your equity funds.
That is the biggest advantage out here. When you select diversified equity as your theme, the entire universe of stocks is in front of you. What to shortlist and what to track becomes a big challenge. In fact, how to track is a much bigger challenge. That problem is partially resolved in case of thematic funds since your focus will now be on a much smaller set of stocks. You can monitor these stocks very easily and also track changes in these stocks.
Thematic approach is not a static approach. You can approach as direct equities or as indirect equities. You can add themes to your portfolio by adding thematic stocks or even by adding thematic funds. When you add multiple themes, they give you an in-built diversification and reduce the overall risk in getting into thematic portfolios.
At the end of the day, Alpha is what equities are all about. In India, majority of the fund managers are able to beat the index. That is not the case in countries like the US where only 10% of the fund managers beat the index. As Indian markets evolve and finding alpha in diversified equities becomes more difficult, there may be no option but to shift to specific themes in a calibrated way. That will be critical when Alpha becomes harder to come by.
We have all heard of how an investment of Rs.10,000 in Wipro in 1980 would be worth Rs.450 crore today. A small investment in Eicher Motors in 2001 would have multiplied nearly 1900 times in the last 17 years. That is the power of themes. A diversified approach cannot help you to identify the big disruptions. That is only possible when you adopt a thematic approach.
A word of caution here! Thematic investing calls for in-depth understanding of the business models and market prospects and hence an expert opinion is called for. It is a lot more complicated than just investing your money in a diversified equity fund. Also, not all themes fructify into big returns. Lastly, themes may take a long time to deliver returns. It is, therefore, advisable to keep your exposure to thematic investing at less than 15% of your overall portfolio!