While artificial intelligence dominates investment discussions, a recent analysis shows it hasn't been the top-performing investment theme over the last five years. Data reveals that themes focused on Future Mobility and Robotics & Automation have delivered superior returns, largely driven by their significant holdings in key technology companies like Nvidia.
Key Takeaways
- Investment themes centered on Future Mobility and Robotics & Automation have outperformed an AI-focused index over the past five years.
- The performance of these top themes is heavily influenced by chipmaker Nvidia, whose stock has surged over 1,200% during the period.
- Analysis of 15 investment themes shows a near 50/50 split between those that beat the global market and those that underperformed.
- Popular themes like Battery Technology and Wellness have significantly lagged due to factors like commodity price volatility and policy concerns.
- Many technology-focused themes show a high correlation with the broader market, raising questions about their value as portfolio diversifiers.
The Difficulty of Picking Winning Themes
Thematic investing, which focuses on long-term trends like renewable energy or digital payments, presents significant challenges. According to an analysis of 15 thematic indexes from Morningstar, the results are mixed. Over the past five years, seven of these themes managed to outperform the broad global stock market, while another seven failed to keep pace.
This data highlights a fundamental risk: even a compelling story about future growth does not guarantee investment success. A successful thematic bet requires the trend to develop as expected, the chosen companies to benefit directly, and their stock prices to reflect that growth without being overvalued at the time of purchase.
History provides cautionary tales, such as the internet boom of the late 1990s. While the internet undeniably transformed society, early investors often paid prices based on unrealistic growth expectations, leading to significant losses when the bubble burst.
Surprising Leaders in Tech Investing
Despite the intense focus on artificial intelligence, it was not the leading thematic investment over the last half-decade. The Morningstar Global Future Mobility Consensus Index and the Morningstar Global Robotics & Automation Consensus Index both posted higher returns than the AI & Big Data equivalent.
This outcome underscores how interconnected modern technology trends are. Both future mobility, which includes autonomous vehicles, and robotics rely heavily on the same advanced computing hardware that powers AI systems.
The Nvidia Factor
A key driver behind the outperformance of the top themes is their significant allocation to Nvidia (NVDA). The company's stock has increased by more than 1,200% in the past five years. Because Nvidia's GPUs are essential for autonomous driving and robotics as well as AI, indexes focused on these themes also captured its explosive growth.
Why Some Popular Themes Falter
While some tech themes soared, others that seemed equally promising have disappointed investors. The performance of the healthcare and battery technology sectors provides clear examples of how external factors can disrupt an investment thesis.
Themes such as Wellness and Life Sciences have been among the worst performers. This is largely attributed to the broader healthcare sector lagging the market due to persistent concerns over government policy and potential downward pressure on drug pricing.
"Investing based on a compelling narrative can be risky. The collapse in lithium prices, for example, severely impacted the Battery Technology theme, even though energy storage remains critical for the future."
The Battery Technology theme has also struggled significantly. Despite the crucial role of energy storage in electric vehicles and decarbonization, the index was heavily impacted by a collapse in lithium prices. An oversupply of the raw material caused prices to plummet, hurting the profitability of lithium producers that constitute a large part of the index.
Assessing Portfolio Impact and Diversification
Investors considering thematic strategies should also evaluate whether these investments add genuine diversification to their portfolios. Many popular themes, especially in technology, have a high degree of overlap with existing broad market indexes.
The technology sector already represents over 25% of the global stock market's value and nearly a third of the U.S. market. As a result, many thematic indexes are heavily weighted toward the same mega-cap tech stocks, like Nvidia, that already dominate standard market-cap-weighted funds.
Correlation with the Broader Market
Data shows that many tech-focused themes, including Cloud Computing and Digital Economy, have a high correlation with the global equities market. This means they tend to move in the same direction, reducing their effectiveness as a tool to diversify risk. In contrast, themes like Cybersecurity and the underperforming healthcare indexes have shown lower correlations, potentially offering better diversification benefits.
Looking Beyond Public Markets
Another consideration for thematic investors is that many of the most innovative companies driving these trends are not publicly traded. Prominent names like SpaceX, OpenAI, and Stripe are still private, meaning their growth is inaccessible through public stock market funds.
For investors, this reinforces the complexity of thematic investing. While identifying a powerful trend like AI is one step, gaining effective and diversified exposure to its growth remains a significant challenge. Some analysts suggest that underperforming themes with low market correlation could present contrarian opportunities, especially if the current AI-driven market rally eventually cools.