In this quarterly thematic review, we analyse the state of thematic strategies in Europe through the lens of performance and flows, as well as any other interesting trends we see in the space. For all of our calculations, we use the WisdomTree Thematic Classification. This classification was developed in early 2021 for our white paper on the Thematic Universe, and we monitor and update it on a quarterly basis. More insights on the thematic space in Europe can also be found in our monthly European thematic update.
Over the last two years, thematic investors have experienced bouts of volatility across many themes, especially in technology-focused thematics that tend to be longer-duration assets more sensitive to interest rate hikes. In our classification, 2022 was the worst year for performance across all sub-clusters in our Universe since 2011, while 2020 was the best year as all sub-clusters outperformed the MSCI ACWI Index.
Winners and losers
After their dismal performance in 2022, many thematic strategies, and tech strategies in particular, enjoyed a rebound at the start of 2023, supported by some expectations of an earlier Federal Reserve (Fed) pivot. Several themes, including “Artificial Intelligence & Big Data”, “Semiconductors”, “Cybersecurity”, “Metaverse”, and “Gaming & Entertainment”, have been propelled by the buzz around ChatGPT and the surge of generative artificial intelligence (AI).
Figure 1: Year-to-date (YTD) and month-to-date (MTD) returns of themes in Europe within the WisdomTree Thematic Classification
Source: WisdomTree, Morningstar, Bloomberg. As of 28 April 2023. All data based on WisdomTree’s internal classification of thematic funds. Performance is based on monthly returns from Morningstar. Please refer to footnotes for the details around the calculation of performance for a given theme.Historical performance is not an indication of future performance, and any investments may go down in value.
With the increasing economic uncertainty, start of the earnings season, and turmoil in the banking sector, April appeared to be a volatile month for many equity strategies. Most themes have posted negative returns, with the correction being bigger across several tech-focused themes, for example “Semiconductors”, “Cloud Computing”, “Cybersecurity” and “Rise of China Tech”.
Within “green” themes, “Sustainable Mobility” and “Sustainable Energy Storage” posted bigger losses. Only 7 themes outperformed the MSCI ACWI Index which was up just 1.44%. Among those, “Digital Health” and “HealthTech” were the only themes from the “Technological Shifts” cluster, as “Demographic & Social Shifts” prevailed in April.
The best-performing themes, year-to-date, are still largely represented by the tech-focused themes, with “Blockchain” by far in the lead. It must be noted that the dispersion of the year-to-date returns between the funds within the “Blockchain” theme is at an extreme level – around 90% return differential between the best and the worst fund.
Despite the rebound in performance across most themes, aggregate flows in the first four months (at less than $0.9 billion) were much subdued year-to-date showing a huge contrast against the last three years. Flows into “Technological Shifts” and “Environmental Pressures” are showing a reversal of a trend from 2022. The former cluster, potentially supported by the stronger year-to-date performance of themes within it, has collected around $0.8 billion in the first four months vs -$4.3 billion outflows last year. At the same time, the “Environmental Pressures” themes raised just above $0.1 billion vs. $14.7 billion in 2022.
In April, flows into “Diversified Thematics” stood out with their positive flows at $66 million, as investors withdrew more than $1 billion from other clusters – with open-ended funds contributing $956 million to that figure.
Figure 2: Historical annual flows in Europe across clusters within the WisdomTree Thematic Classification ($ millions)
Source: WisdomTree, Morningstar, Bloomberg. Period from 31 December 2010 to 28 April 2023. Data based on WisdomTree’s internal classification of thematic funds.Historical performance is not an indication of future performance, and any investments may go down in value.
At the theme level, “Sustainable Energy Production” continues to resonate the most with investors in Europe, holding the top spot by flows over the last years. Exchange-traded funds (ETFs), however, have only detracted from the theme’s year-to-date flows, despite a wide offering of strategies. Another standout by flows, “Rise of the Middle Class”, is showing a mix of positive net flows from both wrappers. “HealthTech”, which closes the top 3 themes by flows, has also raised most of the year-to-date assets within open-ended funds. In contrast, ETFs are dominating positive year-to-date flows in “AI & Big Data” and “Sustainable Resource Management” and claim all inflows in the “Semiconductors” theme.
ETFs are also driving the bulk of redemptions in 2023 within the “Equality, Inclusion & Diversity” theme, while open-ended funds are responsible for most outflows in the other two themes within the bottom 3 – “Aging Population” and “Sustainable Food”.
Figure 3: Year-to-date (YTD) and month-to-date (MTD) flows into ETFs and open-ended funds (OE) in Europe within the WisdomTree Thematic Classification ($ millions)
Source: WisdomTree, Morningstar, Bloomberg. As of 28 April 2023. Data based on WisdomTree’s internal classification of thematic funds.Historical performance is not an indication of future performance, and any investments may go down in value.
The second half of 00’s was associated with the ascent of assets in the “Environmental Pressures” cluster that continues today. However, the biggest growth in the last decade up to August 2021 happened in “Technological Shifts”, as the cluster rivalled the dominance of “Environmental Pressures”. The global rotation out of growth stocks at the end of 2021, and the monetary tightening throughout last year, resulted in an almost halving of assets in technology-focused thematics. However, the drop was mostly driven by performance and not investor redemptions. In turn, “Environmental Pressures”, after reaching their peak in January 2022, held up better throughout the rest of the year. At the end of April 2023, technology-focused thematics represented only 55% of assets allocated to “green” themes.
Figure 4: Historical assets under management (AuM) in Europe across clusters within the WisdomTree Thematic Classification ($ millions)