Allocating to Thematic Investments

Abstract

We introduce the notion of themes as an additional investment dimension beyond asset classes, regions, sectors and styles, and propose a framework to allocate to thematic investments at a strategic asset allocation level. Allocating to themes requires discipline because thematic investments are not only exposed to the theme but also to the traditional risk factors. Our approach uses a framework based on robust portfolio optimisation, which accounts for the expected excess return from the exposure to the theme and from exposures to traditional risk factors. We provide an example to illustrate how thematic investments fit in traditional multi-asset portfolios.

Keywords:

• asset allocation
• core satellite
• portfolio construction
• portfolio optimisation
• thematic investing
• themes

PL Credits: 0.75:

Acknowledgements

We are grateful to the editor and to the reviewers for their comments and suggestions that helped us to significantly improve the manuscript. We are also grateful for valuable comments from Alexander Bernhardt, Clément Dupire, Daniel Morris, Edward Lees, François Soupé, Frederic Surry, Guy Davies, Jane Ambachtsheer, Marco Barbaro, Michael Victoros, Pieter Oyens, Tarek Issaoui, Thomas Heckel, Ulrik Fugmann, and Yannick Leite Velho.

Disclosure Statement

The authors report no conflicts of interest. The authors alone are responsible for the content and writing of the paper.

Notes

1 Lasso (least absolute shrinkage and selection operator) is a regression analysis method that performs both variable selection and regularisation in order to enhance the prediction accuracy and interpretability of the resulting statistical model. Regularisation is the process of adding information in order to prevent overfitting or solve an ill-posed problem (for more on Lasso regressions see Hastie, Tibshirani, and Wainwright 2015).

2 The major thematic index providers including S&P Kensho, MSCI and FTSE report their thematic indices in USD while ECPI in EUR.

Additional information

Notes on contributors

Koye Somefun

Koye Somefun is the head of Multi-Asset and Solutions in the Quant Research Group at BNP Paribas Asset Management, Herengracht, Amsterdam, The Netherlands.

Romain Perchet

Romain Perchet is the head of Multi-Assets in the Quant Research Group at BNP Paribas Asset Management, Paris, France.

Chenyang Yin

Chenyang Yin is an analyst in Multi-Assets in the Quant Research Group at BNP Paribas Asset Management, Paris, France.

Raul Leote de Carvalho

Raul Leote de Carvalho is the deputy head of the Quant Research Group at BNP Paribas Asset Management, Paris, France.