Are You Sensing a Theme? A Beginner’s Guide to Targeting Thematic Investors

Written By George Tripkos, Senior Consultant

June 22, 2022

Congratulations! You made it through another earnings season. But it won’t be long before it’s time to start gearing up for the next one. For most IROs, this will include finding some new investors. And that means stepping up your targeting game.

Last week, we discussed the notion that IR teams have some work to do to improve targeting efforts—or the practice of aligning outreach with potential investors whose style and characteristics align with that of the company’s. We explored how the entire process is about balancing quality with quantity: Put too many firms in front of your CEO that don’t quite match your company’s interests, and you will yield a low ROI.

To find the sweet spot, last week’s article recommended targeting at the fund level. This week, we want to take a deeper dive into what that means and how to do it effectively. Thematic investing offers a great place to dive in.

Thematic funds take targeting to the next level.

Thematic funds are the new kid on the block in the investing universe, but they are well worth getting to know. Thematic investing, as defined by Blackrock, is “an approach which focuses on predicted long-term trends rather than specific companies or sectors, enabling investors to access structural, one-off shifts that can change an entire industry.”

With the finance industry trending toward more specialized products, thematic funds empower investors to pour assets into themes and subindustries they care about or find interesting. And this is proving to be a highly appealing strategy. A Morningstar report found that thematic funds have more than tripled over the last three years, accounting for $806 billion in worldwide assets under management at the end of 2021. Already, the potential themes for these funds have grown into a vast list that will only continue to multiply. Some of the most common themes include:

  • ESG
  • Disruptive Technology
  • Cybersecurity
  • Renewable Energy
  • Fintech
  • Electric Vehicles
  • Artificial Intelligence
  • Automation & Robotics
  • Water Technology
  • 5G
  • Gaming & E-Sports
  • Cloud Computing
  • Nutrition
  • Genomics
  • Ecommerce
  • Circular Economy
  • Precious Metals
  • Healthcare Innovation
  • Space Exploration
  • Marijuana
  • Agribusiness

Narrow the playing field in your competition for capital.

On top of their outsized growth, thematic funds give companies a leg up in their targeting efforts. Portfolio managers have a much smaller investable universe when investing for specific themes than, say, your standard value, growth, or market-cap focused fund. This means that if your company fits the theme of a particular fund, you will be competing against far fewer companies for that fund’s capital.

Let’s put some numbers to this theory. Imagine you are a small-cap U.S. company that provides irrigation technology with a growth narrative, which fits into the clean water theme. The MSCI ACWI IMI index (which covers the full investable market) contains 9,189 companies. Now, if you want to target growth funds, the MSCI ACWI IMI Growth index has 1,494 companies—better, but still a large number of companies competing for capital. However, if you take an even deeper dive, the MSCI ACWI IMI Sustainable Water Transition index only includes 94 companies. A portfolio manager that builds a fund benchmarked to this index has a much higher likelihood of being interested in your story and ultimately investing in your business.

This fund manager would also be more likely to stay with you over the long haul. Just as your company stands to benefit from a smaller investable universe in the initial selection process, the same logic applies to switching companies out of the fund. There are simply far fewer options from which the portfolio manager can choose, leading to naturally lower turnover.

Arm your team with better intel.

By their nature, thematic funds offer up a much clearer picture of the portfolio manager’s interests. This allows you to better equip your management teams with tailored talking points heading into meetings. Because thematic funds are so much more focused than the average fund, IROs can also better analyze trends—and do so more efficiently. Thematic funds are growing in popularity, but there are still far fewer of them than there are more general funds. So, you will spend less time sifting through all the applicable funds to pick up on the trends.

You can apply this trend analysis to shareholder bases to help find great targets. Going back to our water company example, let’s say there are a number of water funds that hold you and your closest peers. When analyzing holdings, you notice these funds have all been selling out of your top competitor over the last several quarters. Some might call this a sector rotation; you can call it a golden opportunity for your company. The capital is earmarked for water-focused companies, and it has to go somewhere. Targeting these fund managers could yield great results as they already have an appetite for your story and, very likely, the capital to feed it.

Find your niche.

If you have down time to spare between earnings seasons, use it to do some thematic fund legwork that can pay big dividends. Put some thought into which themes are a good match for your company profile. Then consider performing targeted outreach to the appropriate fund managers. This approach can significantly increase the ROI on your targeting efforts and give you access to unique capital dollars that have a much smaller pool of viable candidates. Want some help exploring thematic funds and investor targeting further? Give us a call. We can assist with effective strategies for sifting through the noise and pinpointing the outreach targets that are more inclined to hear your story and to become your next investors.

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