Investing in ideas, without losing diversification

Ancient Greek philosopher Heraclitus famously expressed the concept that ‘the only constant in life is change’. Fast forward to today, this sagacious expression is relevant more than ever before, due to the unprecedented degree of change we are surrounded with, which is progressing at an extraordinarily rapid pace.

Artificial Intelligence (AI), energy transition, demographic transformation these are just a few of the global shifts that are currently reshaping not only how we work, but also how we live.

Though we may tend to greet the unfamiliar with a healthy degree of scepticism, it is through disruption that new paths open up. For many investors, the natural instinct is to want a stake in these opportunities as they emerge. Yet, a fundamental question arises how do you gain exposure to the sectors you believe in, while heeding the timeless wisdom of never putting all your eggs in one basket?

At Moneyfarm, we believe that exercising conviction and caution are not mutually exclusive. Our Thematic Investing is designed to encompass both, allowing you to direct up to 20% of your portfolio towards the trends you believe will shape the decades ahead, while keeping the majority of your investments anchored in a globally diversified, actively managed portfolio. Diversification and customisation work in tandem to achieve a powerful synergy.

What is Thematic Investing?

Thematic Investing is a strategy of targeting those areas in the economy expected to undergo significant development in the future, with the aim of generating greater long-term returns. In other words, it is a research-driven approach to capturing growth in the areas most likely to define the economy of tomorrow. This is achieved through the identification of three layers

Megatrends represent the overarching phenomena underpinning change (for example, the digital transformation of the global economy).

Growth Themes are a group of thematically linked investments, each targeting areas of high growth potential. They are encompassed within Megatrends and entail more specific areas of opportunity (for example, clean energy).

Exchange Traded Funds (ETFs) are the concrete investment ‘vehicles’ through which we provide exposure to the areas of interest. Structured as a collection of underlying investments, ETFs provide the benefit of instant diversification and broad exposure.

To further elucidate, it might be worth noting that Thematic Investing does not involve speculation on individual companies, nor an attempt to time the market. It also does not entail allocating capital by geography or sector in the conventional sense, but rather targeting the underlying trends themselves.

Our Growth Themes 

We currently offer three Growth Themes, each focusing on a unique set of sectors

1. Sustainability targets the global transition towards a greener, more resource-efficient world. We recognise that the shift away from non-renewable sources alongside the increasing need to limit waste and pollution is posing significant challenges. The theme captures those investment opportunities that arise as a result of companies innovating their operations and devising solutions to address such challenges.
2. Technology captures those businesses driving digital development globally. From AI to robotics, technology is attracting high levels of investors’ interest and, thus, may benefit from above-average earnings and growth potential.
3. Multi-trend this represents a blend of the aforementioned themes. Rather than focusing on a single area, it offers exposure to a broader thematic universe, hence representing a more diversified approach. 

Past Performance

1y (2/6/25 – 3/6/26)

• Sustainability 36.9%
• Technology 53.7%
• Multi-trend 50.6%

3y (1/6/23 – 3/6/26)

• Sustainability 32.6%
• Technology 81.6%
• Multi-trend 86.0%

5y (1/6/21 – 3/6/26)

• Sustainability 29.8%
• Technology 78.2%
• Multi-trend 77.3%

While all three themes have delivered positive returns over recent years, the sustainability theme has lagged its counterparts – a gap that reflects the specific characteristics of the sectors it invests in. Please remember that past performance is not a reliable indicator of future performance. 

Clean energy companies tend to require substantial upfront capital to finance infrastructure projects, often financed by debt. When central banks embarked on one of the most rapid rate-hiking cycles in modern history from 2022 onwards – with the US Federal Reserve raising rates from near zero to above 5% – the impact on the sector was felt heavily. A higher overall interest rate environment can directly increase the cost of servicing any outstanding debt, thus reducing profit margins, while also leading to the present value of future cash flows being discounted. This tends to affect capital-intensive businesses in particular.

After experiencing a speculative surge that reached its peak in early 2021, by late 2023 the S&P Global Clean Energy Index fell by roughly 40% to 50%, with clean energy stocks collectively losing a significant portion of market capitalisation during a similar period. This was not necessarily caused by a reduction in demand for green technology, which in fact saw global spending hit record highs. Instead, the downturn was primarily driven by adverse macroeconomic factors and an overall rush to control inflation.

Geopolitical tensions have added further headwind when energy security becomes crucial, government priorities can shift towards immediate fossil fuel supply over longer-term renewable transition – creating uncertainty for many companies in this space.

From 2025 onwards, however, the picture started to change meaningfully. As monetary policy began to ease, direct relief was provided to interest-rate-sensitive sectors, contributing to the subsequent recovery in valuations. While short-term divergence between themes is entirely normal, the longer-term investment case for Sustainability-related companies remains compelling, underpinned by structural transitions that are still in their early stages.

While the Sustainability theme underwent a particularly challenging period, the Technology and Multi-trend themes benefitted from an extraordinary surge in demand for semiconductors, robotics and AI-driven infrastructure. Corporate AI investment reached $252 billion globally in 2024, while private investments in generative AI alone exceeded $33.9 billion, over eight times its 2022 level. Companies involved in this area were able to deliver remarkable earnings growth which directly bolstered portfolio returns, naturally widening the performance gap seen in the charts above.

Why themes don’t undermine diversification

One of the most fundamental principles in investing is achieving an efficient asset allocation while maintaining appropriate diversification to manage portfolio risk. When a portfolio becomes too heavily weighted towards a single sector, concentration risk increases, alongside its vulnerability to specific events of that area. A sudden shift in government regulation, interest rates or market sentiment could be more comfortably absorbed by a well-diversified portfolio compared to a highly-concentrated one.

At Moneyfarm, our approach to Thematic Investing is designed around the core-satellite model. The core of your portfolio remains broadly diversified and actively managed, while a controlled satellite allocation is directed towards your chosen growth themes.

Crucially, each theme within your satellite allocation is composed of several ETFs, with every ETF in turn holding hundreds of underlying companies. This ensures robust diversification at every level, resulting in an overall setup where conviction and caution coexist you gain exposure to the megatrends you believe in, without compromising the stability of a professionally constructed, globally diversified portfolio.

Is it right for you?

Growth Themes are available to clients holding a Stocks and Shares ISA or General Investment Account with a minimum of £10,000 invested, and are best suited to those with a medium-to-long-term time horizon of at least three to six years.

Once Thematic Investing has been selected, we assign you a personal quota of up to 20% of your overall portfolio to allocate towards your chosen theme or themes, with the precise percentage calibrated to your individual risk profile across our seven risk levels.

It is worth noting that, because themes allocate a portion of your portfolio in specific sectors, you may experience periods of higher volatility than a standard portfolio. This approach therefore tends to be most appropriate for those focused on long-term growth potential.

Additionally, our Asset Allocation Team regularly reviews the composition of each theme and applies rebalancing where necessary, ensuring that pursuing global trends never comes at the expense of sound risk management.

At Moneyfarm, we specialise in offering exceptional client service and professional financial guidance to help you build an investment plan tailored to your specific life goals and risk preferences. If you would like personalised guidance to help you achieve your holistic financial aspirations, you can book a free appointment to talk through your financial situation.

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.