Thematic investing has gained popularity in recent years as a way to profit from structural changes in the world around us — effectively ignoring the traditional investment boundaries of country, region and sector.

Specialist funds allow investors to profit from ‘megatrends’ set to unfold over coming years or even decades. These trends could be radical advances in technology, environmental changes or social and demographic shifts.

Some thematic funds are very specific and may stick with a single trend such as water scarcity. Others may invest in a range of themes.

Of course, most fund managers consider a wide range of long-term trends when they decide whether to hold certain shares, as future structural changes could affect a company’s share price.

In addition, hundreds of specialist funds and investment trusts focus on an individual sector or industry — an approach that has much in common with thematic investing. These funds may channel their energies into areas from mining or technology to healthcare.

However, thematic funds tend to take a wider, more forward-looking view. They aim to identify future winners by anticipating global trends, and thereby to produce better returns over the longer term than ordinary funds fixated on yesterday’s success stories.

Wealth and asset management company Pictet has been offering thematic funds in the UK for the past eight years.

Hans Peter Portner, head of sector and theme funds at Pictet, says: ‘Megatrends such as globalisation and demographic development are structural forces that will influence the future. We seek to invest in companies whose earnings and revenue prospects are materially influenced by the megatrends at play in their industry.

‘But not all industries in which megatrends are prevalent are investable: determining the feasibility of a thematic investing strategy is an essential step in the process.’

Pictet currently has nine core thematic funds, including water, premium brands and security, plus two funds of funds: Global Megatrends Selection and Environmental Megatrends Selection .

The Pictet Security fund. managed by Yves Kramer, gives a flavour of what a thematic fund may look like. It invests in around 40-70 companies that provide a range of products and services ranging from encrypted mobile phone payments to safety devices for cars.

One area the fund focuses on is cloud computing and data storage. There has been a huge surge in the amount of data created in recent years, as more of us work online. Around 90 per cent of all the digital data currently in existence was created in the past two years, according to IBM. However, this makes it a target for criminals: online crime costs $110 billion (£72 billion) a year, according to US online security firm Symantec.

This presents a major business opportunity for companies involved in cyber security and secure cloud computing. Among the fund’s biggest holdings in this area are Gemalto, a Dutch online security firm, and Symantec.

Another promising growth area, according to Pictet, is active safety car technology, or what the industry calls advanced driver assistance systems, designed to help drivers avoid accidents. Almost a tenth of the Pictet Security portfolio is invested in transportation safety technology in trucks, trains and cars.

The fund’s manager believes demand for this technology will be fuelled by tighter regulation, as more governments require car manufacturers to install increasingly sophisticated safety equipment in new models. One way the fund gains exposure to this market is through Autoliv, a Swedish manufacturer of vehicle safety systems, including airbags.

Pictet Security has done well so far. The fund was up around 16 per cent in 2014 and has risen in value by almost 95 per cent over the past five years, according to Trustnet.

That said, other funds in the Pictet stable have proved less successful. The Pictet Clean Energy fund. launched in 2007, suffered poor returns when the European renewable energy sector was hit by a glut of cheaper technology from Asia, and by the abandonment by western governments of expensive green energy targets in the wake of the global financial crisis.

The fund fell by 20 per cent in 2011. However, switching to satisfying growing demand for energy efficient products and natural gas has improved returns.

Jason Hollands, managing director of communications at broker Tilney Bestinvest, observes: ‘A raft of climate change thematic funds were launched from 2007 to 2008, when the news headlines were dominated by stories on global warming.

‘However, much of the world became considerably less enthusiastic about reducing carbon emissions once the hard economic realities of the financial crisis took precedence. More recently, sliding oil prices have made renewable energy look incredibly expensive. Many of these climate change funds have therefore seriously lagged global equity returns since launch.’

Newton, a boutique asset manager owned by US investment bank BNY Mellon, is another leader in thematic investing, but it takes a different approach. Rather than offering a specific range of funds tailored to each theme, it has developed a ‘global thematic framework’ currently covering a number of trends that contribute to the broader investment strategies of its fund managers.

Laith Khalaf, senior analyst at broker Hargreaves Lansdown, comments: ‘I would say Newton is the grand master of thematic investing. It employs a global thematic approach to help it uncover the key risks and opportunities in the market. These themes evolve over time, which allows it to benefit from changing market conditions.’

One of Newton’s key themes is debt burden, reflecting the fact that investors can profit in a climate where debts are overwhelming western economies and policymakers are struggling to respond. The rationale for this theme is that excessive debt will reduce the potential for economic growth in future, and that in this climate, companies that offer stable earnings growth will look attractive.

Another theme called population dynamics looks to capitalise on demographic changes around the world by addressing the opportunities and threats that arise from ageing populations.

James Harries, an investment manager at Newton, says: ‘We believe that in future investors are likely to see structurally lower asset prices, slower economies and a more challenging environment generally, as a result of ageing populations. Such population dynamics are hugely important and incredibly profound. When allied with fundamental research, we can identify favourable areas for long-term investments.’

Khalaf adds: ‘The pessimistic outlook that Newton supports suggests it is likely to favour more defensive shares in future, including tobacco stocks. These pay out a steady, reliable income and provide returns that are not linked to the wider business cycle.’

Newton has a range of funds, all of which are run according to the principles of thematic investing, but Khalaf picks Newton Real Return and Newton Global Higher Income as his top tips.

Newton Real Return. managed by Iain Stewart, is a targeted absolute return fund aiming to produce steady positive returns, even in volatile markets, by holding a range of assets, including shares, bonds and cash. Newton Global Higher Income is a global equity income fund managed by James Harries.

Asset manager Sarasin was an early pioneer in thematic investing. It offers both funds targeting individual themes and broader equity funds that employ an investment strategy based on a variety of long-term trends. It specialises in agriculture and food production. Sarasin Food and Agriculture Opportunities fund rose by 8.2 per cent in 2014 and has risen by 28.3 per cent over the past five years.

Of course, thematic managers need to keep a constant eye out for new emergent themes. Simon Pryke, chief investment officer at Newton, has recently flagged up two themes in its stable that are particularly relevant.

The first is called financialisation. Pryke explains: ‘The scale, complexity and interconnectedness of global financial markets has mushroomed in recent decades, encouraged by deregulation and financial and technological innovation.

‘Strong vested interests, weak regulatory control and complicit politicians have allowed finance to dominate, rather than serve, economies. One consequence is that, despite some improvements in capital, funding and regulation, the scale of global finance remains much as it was in the run up to the credit crisis.’

While this may sound negative, it’s likely that some companies will perform well in this environment. For example, for the first time since before the credit crunch, Newton is tipping US banks, partly because of their attractive valuations and ability to profit from changes in global financial markets since the credit crunch.

Meanwhile, another theme Newton has recently updated is called smart revolution. Pryke says: ‘A range of technologies are making networks, systems, processes and products of all kinds increasingly responsive and intelligent.

‘In turn, these smart entities have the potential to enhance efficiency and productivity radically, as well as enabling more targeted and tailored products. Smart technologies and enterprises will cause disruption across societies as a greater range of tasks emerge where machines are able to replace human workers.’

Should you invest? Advisers suggest using thematic funds as part of a diversified portfolio, particularly those targeted at very specific trends, such as water resources. According to Patrick Connolly, head of communications at financial adviser firm Chase de Vere, there is often a thin line between thematic funds and specialist funds.

‘There is therefore a danger that thematic investing can mean less diversification and higher risk,’ he explains. ‘However, thematic trends can work if they are used sensibly and not too much reliance is placed on any particular theme.’

Khalaf is more circumspect. He says: ‘These funds may be suitable for more sophisticated investors looking for specialist exposure to a particular asset or area, and be more short-term or tactical.’ However, less experienced investors may be better off going for a more general fund.

Hollands says he is sceptical about the ability of fund managers to accurately identify long-term megatrends. ‘Fund managers are detail people and acutely aware of being measured on quite short time horizons, and that mindset doesn’t readily co-exist with being prophets of long-term strategic trends,’ he says.

‘The reality is that thematic products are prone to being faddish, launched either at the behest of sales and marketing teams or sometimes because a manger gets a bee in their bonnet. Investment themes, like clothing fashions and fund managers, come and go.’

Gavin Haynes, managing director at advisory firm Whitechurch Securities, emphasises the importance of successful stock selection as well as theme identification. ‘Thematic funds are highly active, so performance relies heavily on the manager,’ he says.

‘Even if a manager has been successful in their thematic selection, the actual stock selection will still affect how well the fund performs. Poor stock selection will hamper returns and undermine any successfully identified thematic trend.’

Some traditional fund managers take longer-term themes into account, without specifically running thematic funds, according to Khalaf.

He says: ‘Crispin Odey, for example, takes a view of where we are in the world and considers national, international, political and economic factors. One theme running through his portfolio at the moment is that parts of the developing world have become uncompetitive, leading him to shun companies and countries with exposure to China.’

Similarly, Darius McDermott, managing director at Chelsea Financial, points to Liontrust Macro UK Growth fund. managed by Jan Luthman and Stephen Bailey, which uses macro-thematic analysis to identify winning investments during this period of economic, political and social change. ‘The managers are not afraid to depart radically from their benchmark by investing in or avoiding certain sectors,’ he says.

Thematic investing fund picks

Newton Global Higher Income

Laith Khalaf, Hargreaves Lansdown

‘This fund aims to produce growing income and long-term capital growth through a global portfolio of shares. An integral part of the investment process is identifying key themes that drive change in the global economy. We rate the fund’s manager, James Harries, highly and believe the fund is an excellent choice for adventurous long-term investors.’

Pictet Global Megatrends

Gavin Haynes, Whitechurch Securities

‘Pictet Global Megatrends focuses on stock market trends resulting from sustainable and secular changes in economic and social factors. This fund offers a truly thematic approach with no geographical constraints. It follows eight investment strategies: agriculture, clean energy, digital communications, health, premium brands, security, timber and water.’

Herald Investment Trust

Jason Hollands, Tilney Bestinvest

‘Herald invests in technology, media and communications. While it invests globally — unlike most tech funds, which are skewed to large US names such as Apple and Microsoft — Herald invests in smaller companies. Some 65 per cent of the portfolio is invested in the UK. The fund has a very diversified portfolio of around 200 names.’

‘This fund of Newton income funds aims to produce a consistent level of income plus capital growth. The fund currently produces income of 3.6 per cent a year, which can be paid quarterly. It has a strong long-term track record, reflecting the consistent performance of Newton’s income funds, and competitive charges for a fund-of-fund arrangement.’