Thematic investing is an investment approach that tries to capitalize on long-term opportunities created by macroeconomic, geopolitical and technological trends. These are generally long-term, structural and transformative shifts that interrupt an existing equilibrium and affect a wide spectrum of industries and social groups.

By getting exposure to these themes, institutional investors hope that the growth potential of the companies positioned to take advantage of structural changes is not yet fully priced in the market today, hence there is alpha to be made.

Thematic investing has a long history, but the trend has generated significant interest in recent years. A recent long-form paper by TD Asset Management Inc. (TDAM) called Thematic Investing: Why Active Management Makes Sense argues that due to the dynamic and uncertain nature of these long-term themes, the most attractive alpha opportunities present themselves to actively managed portfolios.

The paper notes that active thematic investing allows portfolio managers with deep research capabilities to not only identify the right disruptive trends, but to also stay vigilant about incumbent companies which might fail and to seek out new disruptive companies as they appear.

The first piece in a two-part series, the paper illustrates these points point by taking a fascinating in-depth look at the development of the mobile phone industry, which has been an area of attractive opportunities. Although the smartphone theme continues to evolve with the introduction of the 5G network, which is expected to bring new opportunities and risks, the past two decades have provided a good playbook for the future.

The paper also details TDAM's active investment approach, which favours companies that focus on efficient capital allocation and have a disciplined approach to return on invested capital as well as sustainable business models – factors that allows these companies to outperform their peers.

For more detail, read the full paper.