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Mutual funds generate better returns with thematic investing

Fund managers’ undergraduate education also plays a role in the success of funds that utilize thematic investing, according to new research from the University of Florida.

GAINESVILLE, Fla. – Risky, trendy, volatile. These are just a few recent descriptions of thematic investing, an emergent investment strategy that focuses on using research to identify companies relevant to themes or trends created by the impact of economic, technological and social changes. Some popular examples of themes that fund managers center their investments around include sustainability, cybersecurity and artificial intelligence.

A new working paper finds that despite their characterization by some, mutual funds that utilize thematic investing perform better, and a mutual fund manager’s educational background is part of the reason why.

Yuehua Tang

Emerson-Merrill Lynch Associate Professor Yuehua Tang.

“Active mutual fund managers are constantly looking for an edge to generate alpha,” said Yuehua Tang, Emerson-Merrill Lynch Associate Professor at the University of Florida. “Given the buzz around thematic investing, we sought to understand if fund managers could use the strategy to generate the best returns, and if so, what gives them this advantage.”

Tang and his co-authors used machine-learning techniques to analyze SEC-required 10-K reports of public companies. In the analysis, the researchers investigated which “risk factors” companies reported in their 10-K documents in order to extract themes across the stock universe and measure each stock’s exposure to different themes. This analysis provided the basis for the researchers to construct a fund-level Thematic Concentration Index (TCI). The more concentrated a mutual fund’s holding of stocks in certain investment themes, the greater the value of the TCI of that fund.

Through their analysis, Tang and his co-authors determined that mutual funds with higher TCI perform significantly better, specifically outperforming between 200-300 basis points per year, leading the researchers to conclude that thematic investment skills give mutual fund managers an advantage. One key feature of the study is that the authors identify thematic investing funds using a bottom-up approach by analyzing the underlying portfolio holdings of the funds.

But what gives these managers an edge when it comes to selecting the best stocks around certain themes? In part, their educational background, in particular their field of undergraduate study.  

“Managers who obtain bachelor’s degrees in a certain field (e.g., science or technology) possess the knowledge or skills to gain an information edge specific to investment themes related to that field,” Tang said. “The initial advantage from undergraduate study also induces specialization through learning and acquiring additional information that translates into profitable investment strategies related to certain themes.”

Based on this research, Tang has a simple recommendation for those who invest in mutual funds.

“Find a mutual fund managed by managers with thematic investing skills (i.e., those with high TCI) and invest in such funds,” he said. “A fund manager who has a background in the theme they focus on will help you generate better returns on your investments.”


John (Jianqiu) Bai – Northeastern University D’Amore-McKim School of Business

Yuehua Tang – University of Florida Warrington College of Business

Chi Wan – University of Massachusetts Boston College of Management

Zafar Yüksel – University of Rhode Island College of Business