One of the most significant trends in equity investing is the development of thematic portfolios; however, there has been limited testing of this concept. Thematic investing is presented in a model framework in the new paper, "Thematic Investing: A Risk-based Perspective".
In the paper, the authors cite several definitions: “Themes are structural trends expected to significantly impact economies and redefine business models.” .... “Thematic investing can be seen as an additional dimension in portfolios.” and “.... themes may pertain to macroeconomic or structural trends that transcend the traditional business cycle.”
More formally, their model looks at the residuals for a set of assets. Cross-sectionally, these residuals should be uncorrelated after accounting for their main factors. In the case of a theme, there should be positive pairwise correlation across the set of assets identified in a theme. There is a relationship that cannot be accounted for by other known factors. Surprisingly, the pairwise correlations are relatively low within a theme. A theme is a set of assets that are identified by a narrative with a common trend. It is trend-following associated with a narrative.
Many identified themes do not prove to be correct, so there is an art to forming themes and not a science.
No comments:
Post a Comment