An index fund is a remarkable thing. For almost nothing it gives you a share of every large company, weighted by what the market thinks each is worth today. For many investors, most of the time, that is the right default, and we say so to clients for whom it is. So why do we build portfolios around themes instead?
What an index actually holds
An index weights companies by their current size. It is, by design, a photograph of the economy as it is, taken this morning. When a new part of the economy grows, the index catches it late, after the growth has already been priced. When an old part shrinks, the index holds it all the way down. That is not a flaw; it is what “passive” means. But it does mean an index investor is always buying the past at full weight.
What a theme is
A theme is a thesis about a change in the economy that is large, durable and not yet fully reflected in prices: the capital being spent to train and run large models, say, or the rebuilding of payment and settlement rails on open networks. A thematic portfolio owns the companies positioned to benefit from that change, across sectors and borders, in weights chosen for the thesis rather than for today’s market capitalisation.
The discipline is in the writing. Every theme we hold has a written thesis with four parts: what is changing, how we express it, what would prove us wrong, and how it is sized. The third part is the one that matters most. A thesis that cannot be wrong is not a thesis; it is a hope.
What it costs
Concentration. A thematic portfolio is less diversified than the whole market and will behave differently from it, sometimes for years. In a year when the theme is out of favour, it will lag an index, and that lag will be visible on every statement. The price of owning the future early is being wrong about the timing more often than an index investor is.
That is why themes live inside a policy. The investment policy sets how much of a portfolio may be thematic at all, caps each theme, keeps the liquidity a client needs outside it, and sets the rules for rebalancing. The structure is what makes the concentration survivable.
Who this is for
Thematic investing suits people with a long horizon, a tolerance for being different from the market, and a reason to want growth beyond what the index will give: a family planning across generations, a foundation with a perpetual horizon, a founder whose wealth already came from being early to something. It does not suit money that will be needed in three years, and we will say so.
Our published theses are on the Theses page. They describe how we think; they are not a recommendation for anyone in particular, and holdings differ by client. The point of publishing them is that you can hold us to them.
This material is for informational purposes only and is not a recommendation to buy or sell any security. All investing involves risk, including loss of principal.