Allocating to Thematic Investments

Allocating to thematic investments can be difficult because they have exposures to multiple risk factors. The authors propose using a framework based on robust portfolio optimization to make themes fit in traditional multi-asset portfolios.

Overview

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.