Asian investors’ appetite for thematic investing increases - Vontobel

Three-quarters of large Asia Pacific investors are likely to increase their exposure to thematic investments over the next three years, according to Vontobel’s latest thematic investing survey in Asia.

A survey of leading institutional investors and intermediaries across five countries in Asia Pacific (APAC) suggests that investors’ approach to thematic investment is evolving and maturing; 89% of respondents have started to adopt a thematic approach in their portfolios, while 75% say they plan to increase their thematic allocations over the next three years.

Thematic investment aims to identify powerful transformational trends, tomorrow’s market leaders as well as the companies best prepared to profit from structural changes, including digitalization, e-commerce, the threats of global warming and rising pollution, resource scarcity and social imbalances among others.

Allocations to thematic strategies are increasing rapidly. Today, about 43% of APAC investors allocate at least one fifth of their equity portfolios according to a thematic approach, closing the gap with Europe (57%).

It is clear that the growth in demand for thematic investment funds has accelerated globally over the past 12 months. Fund flows reflect this and continue to break records every quarter. The latest Morningstar data, for example, shows global sustainable fund assets hitting a new high of USD 2.3 trillion in the second quarter of 2021, led by equities. By region, Europe secured the majority of net inflows, at USD 112.4 billion, followed by the US at USD 17.6 billion and then Asia at USD 1.2 billion. Even despite a deceleration in Asia Pacific in the pace of net inflows from the first three months of 2021, it was the fifth consecutive quarter of growth overall.

Regardless of the high-level appetite for thematic strategies, fuelled in part by the acceleration of certain market trends due to Covid-19, there are notable differences from one portfolio to the next in Asia Pacific, in relation to exposure, priorities and future plans.

Active investing much preferred in APAC

The study revealed that there is stark contrast between geographies when it comes to the preferred investment style for thematic strategies. In Asia Pacific, 57 % of investors take either an entirely active (11 %) or mostly active (46 %) approach, with only 7 % of respondents prefer to be largely passive, which is in contrast to Europe, where 23% investors favour an active approach.

The APAC study also identifies what is popular among intermediaries and institutions – both currently and with a one- to- three-year time horizon. Across both types of investors, two clear themes are front-of-mind: climate change and ESG (environmental, social and governance) investing, and new technologies such as AI, robotics and 5G on the other. The region is also clearly and heavily influenced by the rate of digital adoption across sectors and markets; digital transformation of the global economy, including fintech, also has strong backing. While social issues relating to demographics, ageing populations and emerging middle-class populations are somewhat popular, they trail the most desirable themes by some distance.

Asian investors interested in a new future

In the coming years, portfolios in Asia Pacific will reflect significant increases in allocation to climate change and ESG investing, however exposure to urbanization and smart cities will likely grow. Investors in this region will also further embrace the “new normal” brought about by the pandemic and the changing behaviour of consumers, along with demographic changes and efforts to realize the goal of carbon neutrality.

“This research finds that for both institutional investors and intermediaries, the question is not whether to invest in thematic strategies, but how to do so effectively. The growth in appetite for thematic strategies has also brought with it awareness among many investors of the need for greater levels of expertise from third party specialists,” says Benny Gay, Head Intermediary Clients Asia, Vontobel. “The study suggests a strong interest in diversifying providers of thematic strategies; 46 % of these investors intend to increase the number of external managers they use for thematic strategies over the next 12 months. “