Thematic Investing in an Innovative Market

As technology and innovation advance across the global economy, many macroeconomic, geopolitical, and technological trends are emerging that have the potential to create structural market changes. From the expansion of robotics and AI to developing clean energy sources and the associated infrastructure, there is a growing need to identify transformative key trends and what market segments they are going to impact.

While traditional classifications like country and industry still provide a helpful framework for analyzing market segments, emerging trends often span multiple categories at once, making it difficult for investors to track exposures across their book. To better incorporate this into factor analysis and portfolio construction workflows, we’re pleased to announce that we have partnered with MSCI to make their Thematic Exposure Standard data available via the Omega Point Data Cloud.

MSCI’s future-focused approach seeks to identify the most significant themes of innovation in the market and quantify the importance of each theme to companies across the global equity universe. This is done through the calculation of a ‘Relevance Score’, which ranges between 0% and 100%. The score enables investors to better understand the economic link that a company has to each theme.

To welcome MSCI’s Thematic Investing dataset to the Omega Point platform, this week’s Factor Spotlight will focus on key highlights of the dataset and introduce insights that come from overlaying the thematic data with our risk management tools. For full details on MSCI’s analytics, please see the MSCI Thematic Relevance Score Methodology paper.

Unpacking Thematic Investing

Our analysis began by pulling thematic exposures for all stocks comprising the MSCI ACWI IMI universe with a few key questions in mind. First, we wanted to examine the distribution of the themes relative to traditional GICS classifications to understand what industries they live in, whether there are areas of concentration, and where investors might focus if they wanted to gain or hedge exposure to these themes. We then took a deeper look at stocks with the strongest representation across all themes in aggregate to further explore their characteristics. Finally, we overlayed the thematic exposures with style factor exposures from the MSCI Global Equity Factor Model to translate the DNA of these themes into style characteristics that reflect the broader market and understand areas of overlap and difference.

MSCI Themes by GICS Industry

The tables below show the top GICS industries based on the number of MSCI ACWI IMI stocks with exposure to the themes listed.

• Tech and Health Care lead the representation, leaning towards Disruptive Technology and Rising Consumer. However, they show key differences as Tech is better represented in Autonomous Tech, Digital Economy, and Next Gen Internet Innovation, while Health Care is more so represented in Genomic Innovation and Digital Health.
• Software and Semiconductors are of particular interest, with Software holding three of the four most represented intersections between industries and themes. On the flipside, Hotels, Restaurants & Leisure, Chemicals, Entertainment, Interactive Media & Services, and Technology Hardware, Storage & Peripherals see modest representation across all themes.
• We see how Rising Consumer is very predominant across all industries, showing how companies from all industries have adjusted their products and services to the changing needs of the consumer population. Simultaneously, we see how Millennials emerge as a more predominant trend in Consumer and Tech while Ageing Society Opportunities sits within Healthcare industries.

MSCI Themes by Stock

The tables below show the top equities in the MSCI ACWI IMI based on their exposures to the themes listed.

• We see a clear trend in the selection of securities with a high focus on Disruptive Technology and Software solutions. The vast majority of these companies correspond to either the Software or the Semiconductor & Semiconductor Equipment industries, both of which depend on consistent innovation to maintain a competitive advantage.
• Within Semiconductors, NVIDIA Corp emerges as a security with many strong exposures across themes. We see 100% scores across 6 themes and 50%+ scores across 11 out of 16 themes. Next-Gen Internet Innovation, Digital Economy, and Disruptive Technology are three themes that are evident when looking back at the historical performance of NVDA. For example, we see a large surge of 24.37% in the stock price on May 25th, attributable to the AI Chip innovation that saw significant demand after its release.

Disruptive Technology Style DNA

The table below shows the average style factor exposure of stocks in the Disruptive Technology theme relative to the average exposure of stocks in the GICS Information Technology sector.

• Relative to the broader MSCI ACWI IMI Information Technology sector, stocks in Disruptive Technology currently show interesting style biases.
• Disruptive Technology leans higher on Earnings Variability, Residual Volatility, and Leverage and lower on Profitability, Earnings Yield, and Investment Quality, which points to the notion that these stocks tend to be earlier in their maturation. They have less stable earnings, take on more debt, and are less profitable. That said, they offer upside should they succeed in disrupting the conventions of the sector.
• They also tend to have higher Carbon Efficiency and ESG ratings, which actually indicate more progressive and innovative environmental, social, and governance practices than the broader sector.
• The much lower average exposure to Momentum describes a trailing year when large and mega-cap, established tech stocks have been in favor relative to the smaller cap space where the Disruptive Technology stocks tend to live.

If you are interested in exploring MSCI’s Thematic Exposure Standard in more detail or would like to discuss all that Omega Point has to offer, please don’t hesitate to contact us.

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