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As I write it feels like the world has gone gold crazy. The precious metal not just taking out all-time highs in nominal terms but also trading way above its ‘real’ or inflation-adjusted highs before turning sharply lower.
This column is not going to attempt a guess at where gold might go next but it is just the latest in countless examples of people latching on to a ‘hot’ theme. Whether that’s the fashion for ESG-related investments a few years back, the meme stocks which came alive in the pandemic period or even, AI.
For as long as there have been financial markets there have been periods of exuberance centred on or in particular areas.
Why it can be hard to predict how a theme will play out
That doesn’t mean investors should dismiss every emerging trend as a passing fad or inevitable bubble.
But it is true that the trajectory and pace at which a theme translates into investment returns can be hard to predict. This is neatly illustrated by both the dotcom boom and the bust which followed in its wake.
With the benefit of hindsight there is no questioning the transformative impact of the internet, However, 25 years ago it was difficult to identify the winners and the losers and investors weren’t applying a great deal of discrimination.
Having gone on a tear in 1999 and 2000, Amazon was one of the loss-making companies caught up in the subsequent correction and only eked out its first profit in 2003. In 2026 it dominates e-commerce and has the world’s leading cloud computing business.
Thematic investment products, such as trackers and ETFs, often face criticism that they launch after most of the profits have already been made. Asset managers usually wait until a theme is widely popular with investors before offering these products to ensure they attract enough interest to be commercially successful.
Indices tracked by ETFs are updated periodically, but they lack the flexibility of actively managed portfolios. This can result in them holding underperforming investments that dilute returns.
An actively managed fund can, in theory, target emerging themes more effectively, though at a higher cost than ETFs. Managers can quickly respond to trends, cover multiple themes, and spot opportunities early. However, identifying thematic funds may require extra research, as their focus is not always obvious from their names.
A core-satellite approach
When considering the incorporation of thematic investments within a broader investment portfolio, the ‘core-satellite’ strategy can offer a useful framework. Under this approach, the portfolio’s core consists of long-term holdings that provide broad exposure across financial markets.
Complementing these are satellite investments, which are typically more focused and opportunistic—such as thematic stocks and funds. While satellite assets may be more volatile than the stable core positions, they also have the potential to deliver higher returns.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
