Closures of thematic investment funds were marginally ahead of new launches globally in the first half of 2024 and it was the first time in 11 years that closures outpaced launches.
Thematic funds, which offer investors opportunities to tap into emerging trends such as artificial intelligence (AI) and alternative energy, have experienced significant growth over the past five years, research show, despite challenges like higher costs, increased volatility, and inherent complexities.
According to Morningstar’s latest Global Thematic Funds Landscape report, assets in thematic funds have almost doubled worldwide, rising from $269 billion to $562 billion in the trailing five years ending June 2024.
The growth of thematic funds, however, has not been linear. The report notes that the post-pandemic bull market propelled global thematic fund assets to a record $892 billion, a more than threefold increase. This surge, which occurred in the wake of the Covid-19 pandemic, was followed by a sharp correction in late 2021, with assets tumbling by over one-third. Despite the recent downturn, the number of live thematic funds has more than doubled to 2,776 in the last five years.
Kenneth Lamont, senior manager research analyst at Morningstar, highlights the importance of understanding the long-term performance of thematic funds. “In the dynamic landscape of thematic funds, growth has been anything but linear. While the post-pandemic bull market catapulted global thematic fund assets to unprecedented heights, we’ve seen a correction with closures now outpacing new launches for the first time in over a decade,” Lamont said. He further emphasised the need for investors to carefully assess the long-term prospects of these funds, as only a fraction have outperformed over extended periods.
The report shows that closures of thematic funds are on the rise. In the first half of 2024, for the first time since 2013, global fund closures slightly outpaced new launches. This shift follows a record-breaking 2021, when 670 new thematic funds were introduced. However, as market volatility increased and investor sentiment shifted, launches declined and closures steadily grew.
Broad thematic funds, which invest across a range of global themes, remain the most popular category by assets. Among these is Pictet-Global Megatrend Select, the world’s largest thematic fund, which targets megatrends such as demographic shifts and evolving consumer themes.
Despite the rapid expansion in thematic funds, the report notes that their long-term performance has been mixed. While 18% of thematic funds outperformed the Morningstar Global Target Market Exposure Index in the trailing year to mid-2024, only 9% succeeded in doing so over the past 15 years.
Additionally, 60% of thematic funds available at the beginning of this period have since closed, underscoring the challenges facing the sector.
