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I first wrote on this topic back in March 2025, when defense was the theme everyone wanted to talk about. Over a year later, the “hot” themes may have changed, but the underlying questions haven't. 

When I talk to peers or entrepreneurial clients these days, one topic always comes up: AI. 

The AI infrastructure buildout has pushed chip designers and the fabs that serve them to valuations that would have seemed absurd three years ago. Hyperscaler capex on AI data centers keeps printing record after record. And a growing list of space companies, from launch providers to satellite operators, are either freshly public or rumored to be heading in a similar direction. Either way: If you've sold a business in the last two years and are managing your own portfolio, chances are someone has pitched you on at least one fund promising exposure to “the next NVIDIA” or “the next SpaceX.”

I get asked about these themes quite a lot, and my answer hasn't changed since I wrote the first version of this piece: when it comes to picking winners within semiconductors, AI, or space, I am not better positioned to judge than anyone else. But what I do know is that investors should be careful, because AI could (still) just be the next flavor of the month. Themes that come to mind include but aren't limited to crypto (hyped in 2021 before crashing back down until last year), renewable energy (unfortunately out-of-favor amid rising rates and a new US president), or micromobility (scooters did not disrupt walking). None of that means semiconductors, AI, or space are bad themes. It means the theme itself is rarely the question that matters most.

So once again, rather than debate whether any single theme makes sense, I try to focus on the general question of thematic investing: What is a 'good' thematic investment? Who do they make sense for, and in what concentration? Let's touch on that.

Before we dive in, it makes sense to talk about how I’d define thematic investing in the first place. To me, thematic investing is an investment strategy that tries to capitalize not on an individual asset class, but on a certain political or technological theme that might span a number of asset classes.

Perhaps it’s easier to give an example. Let’s take the current theme of AI infrastructure, along the lifecycle of a company:

Not all thematic investment strategies are so multi-asset in nature. There’s countless thematic funds and ETFs that focus solely on public equities, or at best, on public equities and public debt. Which brings us to our next question - what should a good thematic investing strategy look like?

In my view, a lot of success in thematic investing comes down to one word: timing.

The ‘easiest’ way to capitalize on a thematic trend, of course, is to be early. If you had bought into crypto back in 2010, had invested in defense stocks in anticipation of Russia’s invasion, or invested in semiconductor capacity in anticipation of the AI buildout years before ChatGPT and Claude became household names, you would’ve made a killing. 

The question, of course, is how early you can be. There're countless themes out there that someone strongly believes but that have failed to materialize so far. In such cases, it might be easier to be a bit late, i.e. jump on a trend just as it is starting to pick up - few people would've expected the space economy to attract the level of institutional capital it has over the past two years, with launch costs falling and satellite constellations becoming investable in their own right. (I can also still remember not-so-distant days when Micron was considered dead to both value and growth investors alike.)

Of course, the challenge with just being ‘long’ a trend, i.e. focusing entirely on its upside through positive adoption, bears the risk that said trend can come to an end. In that case, let’s take the example of renewable energy: while clearly a key theme over the last decade (and the decades to come), renewable energy was particularly in focus amid the Biden Administration’s IRA and a general public interest in fighting climate change. With the new government less favorable on the topic, and as private individuals struggle with higher prices and rising unemployment, renewable energy fell out of favor - few consumers and companies want to pay more (or are able to pay more) for simply knowing that their electricity is clean. A decline in stock prices of such companies soon followed.

Interestingly enough, many of these companies aren’t struggling - quite the opposite, actually. Many energy producers in Europe saw record earnings in 2022 amid higher volatility in electricity prices after Russian gas became unavailable. Production prices of solar farms, wind turbines continue to come down, further accelerating adoption. 

But of course, all of this was little solace to a ‘long-only’ thematic investor in renewable energy in the pre-AI boom cycle: They were down double-digit percentages from their peaks, below high water marks if they have a carry, and struggling to find new investors for an out-of-favor theme. In some cases, the prospect of using renewable energy for data centers did bring back the animal spirits somewhat - but not in all of them. In the end, it’s like the struggle of many European small-cap value investors over the recent years - no use if your stocks are trading at 1x P/E and trending even cheaper when nobody wants to buy them.

Which brings us to the other key component of thematic investing: Investing in the theme across the entire cycle. Finding a thematic trend and riding it to its heights is possible, but brings the issue of what to do once that peak is reached. A good thematic investor is not just a ‘tourist’ in his respective theme or niche, but able to capitalize on that theme across the cycle, using different types of investments and instruments that are properly positioned in each phase.

To exemplify this, let’s take a look at the wider energy sector. Many investors were able to ride the rally in US shale back in the mid-2010s, but if they were just investing ‘long only’, they would’ve run into substantial drawdowns as oil prices collapsed in late 2015. At that moment in time, a skillful thematic investor is able to also use other instruments - such as buying into the high-yield debt of those struggling players, making substantial profits on the recovery, or using a debt-to-equity swap to take said companies private at low creation multiples. In recent years, they might’ve been able to avoid the historical event of below-zero oil prices in the early COVID days, before then betting not only on conventional energy but also the aforementioned trend in renewable energy - and perhaps today betting on low-revenue, high-hype nuclear energy reactors aimed at providing (allegedly?) limitless energy to data centers.

As I said earlier, a good thematic investor isn’t just trying to hop from theme to theme. They found their theme in which they have unparalleled knowledge, and know how to find a winning bet, no matter what part of the cycle they find themselves in.

So let’s assume you found such a manager. How do they fit into your portfolio? And should you think about placing thematic bets yourself?

Fitting such managers into a diversified portfolio can actually be more challenging than one would think. You’d expect such a manager to offer outstanding performance relative to their (industry/sector) benchmark, across the cycle. But the key word here is relative: nobody will cheer you on for being down just -20% when your industry is down -30%. Of course, the upswings might be comparably larger than for a regular, diversified equity fund. But this higher volatility necessitates a substantial level of diversification, not just investing in one manager next to your portfolio, but ideally adding ten or more managers, each focused on a certain sector or theme.

In the ideal world, the resulting portfolio would offer the same or higher returns and/or lower or the same risk. In either case, an investor in such a portfolio should be prepared for tracking error to conventional benchmarks, especially in the case of underlying managers that stray substantially from conventional portfolio positioning. And as is the case with any form of active management, directly or through manager selection: Be prepared to invest a lot of time into due diligence and ongoing screening, and be prepared that even some managers investing across the cycle might have to be replaced at some point.

Let’s look at a story from my own experience on thematic and sectoral investing in private equity: I vividly remember meeting a private equity fund that was specialized in small-cap healthcare companies in a single US state. They had outstanding returns (think 3-5x across multiple funds). And they were able to let us in as a comparably small investor. But did we go for it? No - given that we were just investing into 3-4 funds per year, and were just starting out with our program, we could not take the risk of picking such a specialized manager. How diversified would we’ve needed to be? I’d compare it to a fund of funds, which  typically diversifies into 8-12 funds, by region, i.e. 16-24 funds if you want to cover US and Europe - which at 1M€ per fund would result in a fund program far beyond our desired size. And that doesn’t even address the complexities of 10 commitments a year, such as due diligence, monitoring, or cash management.

Does that mean we should write off thematic investing entirely unless we can build a massive portfolio? Not necessarily - you can also approach the matter from a core-satellite approach. Here, let’s take a look at venture capital: If you have a diversified ‘core’ portfolio of high-quality, multi-stage and multi-industry managers, I do see benefit in adding niche, specialized managers in smaller allocations. However, when combining those funds, make sure you can stomach the risk if their associated theme happens to run into challenging years for your vintage year fund - which I personally experienced with some ‘top of the cycle’ crypto fund investments. Will they recover? Time will tell.

Before we conclude this article, let’s tackle the question of investing in themes yourself - i.e. direct investments into specific companies or instruments, without a skilled manager as an intermediary. 

Generally, I would recommend against trying your hand at thematic investing. I will admit that I know some extremely successful investors who made a killing simply by betting on vibes - or as a more academically inclined investor might call it, momentum. But most likely, by the time a hyped theme reaches your desk, it is already past the phase where most value creation for investors took place, yet the theme is still ‘hot’ enough that a manager can make money off of it through management fees. Unless you are razor-focused as an investor or family office on thinking which themes could be relevant in the next 3-5 years, and are willing to make multiple bets of which likely the majority will not pay off, you are better off with long-term, diversified investments in the conventional ‘asset class’ logic.

But there is one exception: I would greatly recommend allocating some of your capital to thematic investing in your personal area of expertise. It is one of the few areas where the ‘operator-turned-investor’ path can be lucrative - I’ve seen many successful operators in industries ranging from fintech to biotech to gaming make some investments on the side in companies that they think can be the next big thing. After all, those operators are typically at the cutting edge of their industry, they can see what new trends are coming over the horizon, and they know where a quick recovery might be most likely if their industry is going through a downturn. It’s a perfect, small allocation for your Aspirational Bucket - not to be taken likely, and the effort not to be underestimated, but a great chance for a shot at outsized returns.

Trying to figure out whether a single fund or a fund of funds structure is the right way for you? We help clients weigh that tradeoff against the rest of their portfolio, so don't hesitate to reach out.