How to seek powerful themes in client portfolios

• Thematic exposures are unique: Investing in forward-looking themes, like artificial intelligence or infrastructure, can introduce unique exposures and risks largely not captured by traditional portfolio building blocks like sectors, regions, or styles.
• Thematic exposures may be rewarded: Companies involved in historically impactful themes, like smart phones and e-commerce, delivered significant outperformance compared to broader markets during their periods of rapid adoption.
• Thematic exposures fit in portfolios: Advisors can consider adding thematic exposures to their client’s portfolios, introducing a new source of potential risk and return, while keeping overall volatility largely in-line.

Thematic investing seeks to harness the return potential of emerging structural trends, like advancements in artificial intelligence or the rebuilding of US infrastructure. The impact of these trends feels undeniable, in 2024, companies identified as “AI- related” within the S&P 500 contributed nearly half of the index’s total returns¹. We think such themes may play a growing role in driving returns going forward, with the Blackrock Investment Institute suggesting “investors should focus more on themes and less on broad asset classes as mega forces reshape whole economies” in their 2025 Outlook.

Yet portfolio management techniques for incorporating thematic investments have been less developed. Questions around how to choose themes, size positions, and fund them have resulted in thematic exposures being underutilized thus far compared to more common equity tilts like sectors and styles. In our analysis found here, we sought to answer these questions and establish a process for advisors looking to add thematic exposure to their portfolios.

There are three key takeaways from the paper.

We found that thematic exposures carry a higher degree of unique risk – that is, risk not explained by common risk factors - compared to more traditional equity exposures like sectors and styles. This makes intuitive sense as theme-specific developments, like a breakthrough in AI technology, will impact AI stocks and is not explained by common risk factors like a firm’s geography, sector classification, or style tilt.

The implication for advisors is that adding themes to a portfolio may bring in new exposure not captured by existing allocations. By going beyond traditional portfolio building blocks, thematic exposures may expand a portfolio manager’s toolkit for potentially delivering long-term alpha.

Thematic tools offer unique risk

We found that past high-conviction themes, like smartphones and e-commerce, demonstrated clear outperformance compared to broader markets during their periods of rapid adoption. For example, during the smartphone boom from 2007-2019, stocks associated with the smartphone industry drastically outperformed the global stock market, with the total return of a hypothetical smartphone basket returning 269% compared to the MSCI ACWI’S 192%². During this same period consumers shifted from Motorola flip phones to iPhones and Galaxys, with 91% of Americans currently owning a smartphone, up from just 35% in 2011.³

Past themes have rewarded the discerning investor

We tested three approaches to introducing themes into advisors’ average equity portfolio: funding from sector exposures, funding from style exposures, and funding from new cash. Our analysis found overall portfolio risk remained largely unchanged, while the underlying risk profile incorporated more unique, theme-specific sources of return. This demonstrates that advisors can introduce themes into client portfolios from common existing positions, helping to diversify sources of potential risk and return, while still managing a client’s risk tolerance.

We created a step-by-step framework to help investors thoughtfully integrate thematic exposures alongside traditional buildings blocks into their portfolios. Advisors can consider the following five steps to add thematic positions to their portfolio:

Check out the Thematic X-Ray in 360 Evaluator

Thematic exposures, underutilized in many portfolios today, can offer a significant opportunity to enhance outperformance potential in a risk-managed way. Thoughtfully integrating thematic exposures allows investors to tap into unique and diversified sources of risk and potential return tied to structural growth trends. While the ride in markets may have its fits and starts, setbacks and breakthroughs, we believe thematic investing holds enduring value in helping investors achieve their financial goals.

Read more about our case study and full explanation of our findings here: