Shiny New Toy

In the realm of investment management, one of the most challenging tasks is convincing clients that jumping onto the bandwagon of the latest, most sophisticated thematic funds might not be the silver bullet they’re seeking for their portfolio.

It’s a tricky situation when a portfolio is underperforming. Most times, doing nothing is probably the best move, but it feels counterintuitive. Clients usually want action; they see their investments shrinking and hear about a new fund that’s gaining traction. “Let’s try that” they say, hoping for a quick fix.

And this is why thematic funds are alluring. They promise to tap into the next big thing—be it a technological breakthrough, a demographic shift, or a new economic trend. Despite their less-than-stellar track record in delivering returns, these funds continue to attract investors.

The reason? It’s all about human psychology. We love a good story. Thematic funds offer just that: a narrative that seems to clarify the often chaotic and unpredictable nature of financial markets. Humans are naturally drawn to stories that make sense of cause and effect.

“A 10% decline in the market is common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealth building power of stocks.” – Christopher Davis

In the confusing world of stocks and bonds, a compelling narrative can feel like a lifeline. Thematic funds capitalize on this. They tell a story of a major change happening in the world, suggesting that by investing in this trend, you can profit from it.

The problem arises when we confuse the truth of the story with the potential for profit. Just because a theme or trend is real (like the rise of the internet, emerging markets’ growth or the development of AI) doesn’t mean it’s automatically a good investment.

Thematic funds thrive on a cycle that can seem beneficial at first: strong performance fuels a convincing narrative, which draws in more investors, boosting performance further. But eventually, this cycle can turn sour. The hype fades, and investors are left wondering what went wrong.

For asset managers, thematic funds are an easy sell. They come with compelling stories that double as marketing pitches. And in the world of investing, where new stories emerge constantly, there’s always a fresh theme to sell.

“The intelligent investor is a realist who sells to optimists and buys from pessimists.” – Benjamin Graham

Despite this, the history of thematic funds is filled with disappointment, raising the question: why do they remain popular?

The answer lies in a common cognitive bias. When a new theme emerges, investors get caught up in the specifics of that story, ignoring the broader history of thematic funds’ failures. This selective attention skews decision-making, focusing on the potential for success without considering the overall track record of such investments.

Most thematic investing is based on flawed beliefs: that trendy assets will yield high returns, that exceptional performance will continue indefinitely, that we can predict complex economic and technological trends accurately, and that being right about a trend guarantees investment success. These beliefs lead investors down a risky path, often with disappointing results.

The irony is that a thematic fund with a real chance of long-term success might not look appealing at first glance. It would likely contradict the current market hype, making it an unpopular choice among those chasing the latest trends.

The key to smart investing is recognizing the power of narratives while basing decisions on solid analysis and diversification. At Luthuli Capital, we understand the allure of the latest market trends and the seemingly irresistible draw of new, shiny funds.

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” – Charlie Munger

However, our team of skilled investment professionals is dedicated to guiding our clients through the often noisy and distracting financial landscape. We prioritize a disciplined approach that focuses on the fundamentals and what truly matters to our clients’ investment strategy.

Our expertise lies in our ability to sift through the market noise, identifying opportunities that align with our clients’ long-term financial goals while steering clear of fleeting trends that do not contribute to sustainable growth.

By maintaining a steadfast focus on the underlying fundamentals of each investment, we ensure that our clients’ portfolios are positioned for resilience and success, regardless of market conditions.

At Luthuli Capital, we believe that the key to successful investing is not chasing after the latest thematic funds but rather, developing a comprehensive and well-thought-out investment strategy that considers each client’s unique financial situation, goals, and risk tolerance.

Our commitment to this principle is what sets us apart and enables us to help our clients achieve their financial aspirations with confidence. So, the next time you’re tempted by the latest thematic fund making headlines, remember that the most attractive story isn’t always the one that leads to wealth.

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