One of the biggest trends in exchange-traded funds in recent years has been the rise of the thematic fund. They’ve become a viable alternative to sector funds. Forgotten in the ETF stampede is the fact thematic mutual funds to buy are also gaining traction with investors.
In February, Morningstar took a look at the global thematic funds’ landscape. It came to some interesting conclusions.
- Worldwide, thematic mutual fund assets grew 160% in the three years ended Dec. 31, 2019, to $195 billion. Ten years ago, they accounted for just 0.1% of total global equity fund assets, to 1% at the end of 2019.
- There are four major themes investors have focused on: Technology (50% of $195 billion), Physical World (22%), Social (18%), and Broad Thematic (10%). The number of main themes is narrow because investors continue to chase performance.
- Picking winning themes is difficult, but the rewards can be significant. However, it’s important to keep in mind that many thematic funds don’t survive. Only 45% of thematic funds launched before 2010 made it to 2020.
That’s a depressing statistic.
- American Beacon Ark Transformational Innovation Fund (MUTF:ADNPX)
- Jacob Internet Fund (MUTF:JAMFX)
- Gabelli Pet Parents Fund (MUTF:PETZX)
- BlackRock Technology Opportunities Fund (MUTF:BGSAX)
- Leland Thomson Reuters Venture Capital Index Fund (MUTF:LDVAX)
- New Alternatives Fund (MUTF:NAEFX)
- Rational Dynamic Brands Fund (MUTF:HSUAX)
And now that I’ve depressed the heck out of investors, here are seven thematic mutual funds to buy I think can make it to 2030 and beyond.
Mutual Funds to Buy: American Beacon Ark Transformational Innovation Fund (ADNPX)
You can’t have a collection of thematic mutual funds without including 2020’s most talked-about investment manager. I’m speaking about Catherine Wood, the chief executive officer and chief investment officer of New York-based Ark Investment Management.
However, the American Beacon Ark Transformational Fund, which Ark acts as sub-advisor, has a reasonably tame $723.4 million in assets under management. That compares to $10.6 billion for its Ark Innovation ETF (NYSEARCA:ARKK).
No surprise, the fund’s mandate is to find and invest in disruptive innovation. Not surprisingly, the investor class of shares has Tesla as its number one holding at a weighting of 11%. That’s more than 400 percentage points higher than InVitae (NYSE:NVTA), the fund’s second-largest holding at 7.2%.
The fund’s top 10 holdings account for 51% of its assets, with the remaining 38 stocks accounting for the remainder.
Think of it as a “best ideas” fund.
Jacob Internet Fund (JAMFX)
Mutual fund thematic investing doesn’t seem to be as industry or sector-specific as ETF investing. No matter. There’s still plenty to choose from.
The Jacob Internet Fund has been around since December 1999, launched right at the height of the dot.com boom and subsequent crash. It seeks to invest in companies that use the internet to grow their businesses.
It isn’t cheap, with an annual management expense ratio of 2.32%. However, when you can deliver a 10-year annualized total return of 18.3%, fees don’t matter nearly as much.
As for the number of holdings, it has 33 stocks in the fund, it turns 100% of the portfolio approximately every two years, and its top 10 holdings account for 54% of its $75.6 million in total net assets.
If you’re thinking of investing in mutual funds to buy like JAMFX, the minimum is $2,500.
Gabelli Pet Parents Fund (PETZX)
As a major pet owner over the years, I would be remiss if I didn’t include this themed fund from Mario Gabelli and company.
The fund got its start a little over two years ago in June 2018. Assets under management are a minuscule $3.1 million.
The fund’s investment strategy invests at least 80% of its assets in the pet industry.
“The pet industry includes companies that offer services and products for pets and pet owners (“Pet Parents”),” states the fund’s website.
“Such companies will generally derive at least 50% of their revenues or profits from, or will devote at least 50% of their assets to the following sectors: manufacturers and distributors of pet food, pet supplies, veterinary pharmaceuticals, veterinary wellness, veterinary and other pet services, pet equipment, pet toys, and products and services that support Pet Parents regarding their pet activities.”
One of the top three holdings is Chewy (NYSE:CHWY), the online pet store that went public in June 2019 after being spun-off by PetSmart. Thanks to the pandemic, Chewy’s stock is up more than 119% in 2020.
How’s the rest of the portfolio done? Very well, thank you, up almost 36% year to date through Oct. 19.
Pets will continue to be a profitable investment space for investors willing to hold for the long haul.
BlackRock Technology Opportunities Fund (BGSAX)
I couldn’t do a mutual fund article without one of the heavy hitters.
The BlackRock Technology Opportunities Fund has $1.9 billion in assets under management, charges a reasonable 1.18% management fee, and only turns its portfolio once every three years.
The fund invests in stocks of all sizes that have sustainable growth from the development, advancement, and use of science and/or technology. Over the past five years, it has an annualized total return of 31.2%, significantly higher (5x) than the Morningstar U.S. Technology Total Return Index.
Interestingly, the top 10 holdings only account for 24% of its assets. This means that the other 73 stocks account for the remaining 76%. That’s a fairly balanced diversification for an actively managed mutual fund.
I realize this BlackRock fund is a relatively plain vanilla tech fund compared to some of the more exotic thematic funds out there today, but when something works, you can’t help but tout its strengths.
The lead manager of the fund is Tony Kim, the head of BlackRock’s technology team. He’s been running the fund for a little more than seven years.
All it does is win.
Leland Thomson Reuters Venture Capital Index Fund (LDVAX)
I wasn’t sure if I would include this particular fund in my group of seven mutual funds to buy. Not because I didn’t think it was a good fund — it’s got a five-star rating from Morningstar for large-cap growth funds over the past three-year and five-year period — but rather because there’s nothing really venture capital about it except the name.
The fund tracks the Thomson Reuters Venture Capital Index’s performance, a collection of companies meant to mimic the U.S. venture capital universe using liquid, publicly traded securities.
Passively managed, it has a high management fee of 1.76% and a high turnover of 115%. Nonetheless, it’s hard to sneeze at the fund’s performance. Over the past five years, it has an annualized total return of 31%.
Its methodology of taking private companies and translating that into public securities involves a fairly robust computer. Perhaps it’s a gimmick, but it definitely takes a unique approach to portfolio construction.
New Alternatives Fund (NAEFX)
The home page for the New Alternatives Fund lays out its objective quite succinctly.
“New Alternatives Fund is a Socially Responsible Mutual Fund focused on renewable energy and the environment. We seek investments in listed companies that have a positive impact on the environment,” it states.
“We invest in Solar, modern Wind Turbines and Hydro Power, Biomass, Energy Conservation, Fuel Cells, Recycling, Clean Water and Natural Foods. Hydro Electric, Wind and Geothermal Power are old and efficient alternative energy sources. All of these sources make for a cleaner environment and reduce the use of fossil fuels.”
Investing in renewable energy and the environment since 1982, the fund got its start in December 2014. It now has $341 million in total net assets invested across 36 stocks, with the top 10 holdings accounting for 48% of the portfolio.
By far, the biggest industry-representation is from renewable energy power producers and developers. They account for 63% of the portfolio.
New Alternatives is a good place to put your hard-earned capital if you’re worried about climate change.
Rational Dynamic Brands Fund (HSUAX)
Last on this list of mutual funds to buy is Rational Dynamic Brands. Its theme could best be described as a play on consumer spending.
“At $18 trillion, the U.S. economy is the largest in the world by GDP. The Household Consumption component ($12 trillion) represents roughly 70% of total economic output. The consumer, via household spending, has been the primary driver of economic growth for over half a century. Brand loyalty and demographic trends drive customer behavior,” states the fund’s website.
“If consumption drives the economy, shouldn’t the most powerful brands be driving your investment portfolio?”
I couldn’t agree more.
Although Rational Funds, the people behind this mutual fund, first opened the fund in 2002, it changed the fund’s name and strategy in October 2017. In the past three years, it had an annualized total return of 21.1%. However, those returns come with a price. It charges 1.5% annually to manage the fund.
The managers start with the 1,000 largest and most liquid stocks. They then remove those that aren’t consumer-focused. Those remaining are ranked by market cap, 3-year total sales, and the growth of those sales. It then comes up with 180 U.S. stocks and 20 international from 70 sub-industries. Those brands are equal-weighted and reconstituted yearly.
As you can see, a lot goes into the construction of the portfolio. That explains why the fund charges what it does.
The theme of consumption never grows old.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.