Tuesday, February 4, 2014

Thematic Investing: The Marketing is Better than the Investment Proposition

Thematic Investing:  The Marketing is Better than the Investment Proposition

Thematic investing has been around for along time.  The idea is to own a group of stocks or bonds that represent a theme or thesis.  Instead of trying to pick individual securities, you wind up with a portfolio that represents an investment in some economic, demographics or other trend.  You can find some exchange-traded funds (ETFs) that provide this opportunity.  However, most thematic investing has to be put together one stock at a time, so it tends to be expensive to execute.
Sketchbook #2 (2001)
A small brokerage firm, called Motif, supported by a big-time board of directors is offering thematic investing with low commissions.  You can build a portfolio of green energy companies, cyber security, water resources, or any other investment thesis, and you incur a relatively small commission ($9.95 for up to a nine stock portfolio). It’s an attractive proposition if thematic investing is your cup of tea.

The New York Times wrote about Motif and its approach on Friday in an article entitled, “When Buying Stock in Gluttony Is a Good Investment.”[1] As is typical of Wall Street, Motif’s marketing is even better than its discount platform.  For the article, Motif had two board members talk about the company: former SEC Chairman Arthur Levitt and former president of Bank of America’s Global Wealth and Investment Management division, Sallie Krawcheck.  They described the virtues of thematic investing.  Mr. Levitt invested in “seven deadly sins,” or the gluttony portfolio, consisting of alcohol, tobacco, and fast food.  Ms. Krawcheck invested in “glass ceilings,” a portfolio of companies headed by women.  Even though thematic investing is supposed to be a long-term endeavor, Mr. Levitt let readers know how much he had on each of three themes in the last 12 months.  Ironically, none of Mr. Levitt’s bets beat the S&P 500.   While Motif’s website is fully of lofty rhetoric, the first images you see on its home page are catchy titles and big gainers (see below).

Thematic investing tends to gain visibility among retail investors about the time a bull market is losing its momentum.  Back in 2000, brokerage firms launched one publicly traded investment vehicle after another targeted at telecommunications, technology, and Internet themes.  Those products were supposed to be long-term investments.  Instead, they led to long-term pain.

While I applaud Motif for driving down trading costs, their talk of long-term thematic investing is just that: talk.  This is yet another Wall Street product to lure investors with visions of making quick money just like the pros. In the end, the company’s founders and Goldman Sachs, which owns a piece of the business, will be the only winners.  They will win because they’ll employ the only reliable long-term investment motif: luring retail investors with visions of big gains.

[1] http://www.nytimes.com/2014/02/01/your-money/when-buying-stock-in-gluttony-is-a-good-investment.html?ref=business

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