The Hindu Business Line : The storyline

THEME-based investing is not new. All bubbles, starting from the boom and bust of the stock price of South Sea Company in 18th century, were based on themes. It has, however, caught the imagination of global investors in recent times.

But what is thematic investing? Consider the observation of Credit Suisse Asset Management UK with respect to one of its equity funds: "Our thematic approach to investing aims to capture major investment themes early and we overweight those stocks which will benefit from such themes, in advance of these companies becoming "flavour of the month". With billions of dollars under investment management and intense competition to deliver returns, even a merely promising theme can attract mind-boggling sums of money. This, then, leads to sudden spurts in the prices of select stocks.

Emerging market was one such theme and in the past 30 months almost all emerging market indices have risen by about 100 per cent. Some markets, such as India, have risen even more. Commodities, fiscal reforms, privatisation and information technology are a few other themes that have attracted big money in recent times.

Little wonder that almost all major global mutual funds now include thematic approaches in their investment strategies. Morgan Stanley recently unveiled a global portfolio based on certain themes. Fund managers of Morgan Stanley Growth Fund observe in their quarterly communication "the way to invest...in the midst of a secular bull-run is to zone into certain themes... Thematic investing has long been a successful investment strategy in India, particularly during up-trends."

Morgan Stanley Growth Fund's managers also picked the financial sector as a theme in 2001, commodities in early 2002, and public sector companies and large under-valued mid-cap stocks in mid-2002. These themes duly ran their course in the stock market. The fund has now picked the power and construction sectors as promising themes.

Themes, however, are prone to strong two-way movements. Investors frequently fail to make money when they invest based on broad themes. Many have the foresight to accurately identify a theme early. But they fail to make money based on this insight because they do not pick the right stocks.

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