Applied Intelligence

In 1982, John Naisbitt popularized the idea of ‘megatrends’ defined as ‘large social, economic, political, and technological changes [that are] slow to form, and once in place, influence us for some time.’

That concept has been industrialized into an investment category. Global thematic investment funds have become a fast-growing segment in asset-management. Instead of relying on traditional sectors, fund managers assemble portfolios with assets positioned to benefit from specific forces expected to shape the coming decades. In its latest report, Morningstar reports that themes tied to security (defense), AI, and automation (robotics) are particularly in vogue.

Thematic funds are complicated to construct. A strict filter produces a small, illiquid universe, while a loose filter produces a large but conceptually impure one.

As in selecting comparable companies for valuation, fund managers can screen along three dimensions: end-market demand drivers, position in the value chain, and financial profile.

In valuation work, the exercise is reductive by design as it consists in narrowing the universe until comparability becomes analytically defensible. In the case of thematic funds, heterogeneity must be tolerated. A ‘water’ portfolio may combine a regulated utility, an industrial conglomerate, and a mid-cap filtration firm, each with very different financial profiles.

The resulting low share price correlation among constituents is often cited as a weakness. But this criticism misses the point of thematic exposure: investors are trying to own the full value chain of a structural trend, not to guess in advance where, within that chain, value will ultimately accrue. Besides, traditional sector classifications are hardly more coherent, as demonstrated in a 2018 study.

The real issue is a different one. Thematic funds tend to be launched when enthusiasm for a theme is already elevated and valuations are high. They have thus a track record of long term underperformance.

That is the irony. William Gibson, the sci-fi writer, famously said, ‘The future is already there – it’s just not evenly distributed.’ Markets, by contrast, tend to recognize a theme only once it has become broadly accepted. In that sense, thematic investing is backward‑looking.

Still, thematic baskets offer a useful signal of how the market thinks today. But the harder and more strategic task is to identify the next theme before it becomes obvious, benchmarked, and branded.

In that context, I would promote ‘Applied Intelligence’ as a new theme. It captures enterprises across any sectors demonstrating advanced AI-integration capabilities allowing them to push the boundaries of operational excellence while winning in the marketplace with new products and services.

No thematic fund appears to be built around this theme yet.

But the future is already there…