The first three columns are MSCI ACWI indices (Core, Growth, and Value), the following nine are the aforementioned passive thematic indices, and the last column represents the profile of an equal-weighted, hypothetical index composed of the nine thematic indices. While most of the themes delivered strong overall 10-year performance, the equal-weighted basket of themes outperformed global equities on both a total-return and a risk-adjusted basis. Additionally, the combined thematic index also outperformed the majority of the standalone themes on a risk-adjusted basis.
There were a few themes that outperformed the equal-weighted thematic basket, but much like “picking winners” in the broader stock market, choosing from a universe of possible thematic plays could be facilitated by utilizing a basket approach to construct a thematic portfolio allocation. As of this writing, however, the marketplace does not offer many diversified implementations of multi-theme indices, limiting the options available to allocators and hence their ability to diversify across a range of structural opportunities. Further, the results from several of these indices may reflect some hindsight bias, as returns for a passive thematic index are often “backfilled” rather than incorporating the true realized returns from a managed portfolio.
2. Most existing passive thematic indices are biased toward the growth factor.
To help understand the factor “footprint” of the return drivers of the passive thematic indices listed above, we employed a performance-based approach to estimate investment-style exposures. We used a three-factor model, similar to the Fama-French approach, to regress the returns of each thematic index to the returns of the MSCI ACWI Index, a “small-size” factor, and a “value” factor.
Figure 2 shows the style exposures of the thematic indices using the regression-based model described above. The equal-weighted index (top row) has a beta of 1.15 to the MSCI ACWI, along with a large and statistically significant (at a 95% confidence level) negative exposure (-0.22) to the value factor. The small-size exposure is positive, though small and insignificant. The equal-weighted index posted strong annualized alpha (2.6%), with its meaningful negative exposure to value providing a tailwind as growth equity leadership extended over the surveyed period: The MSCI ACWI Growth achieved a higher risk-adjusted return than the MSCI ACWI Value (Figure 1).
The remaining rows in Figure 2 show style exposures for each of the passive thematic indices. Interestingly, each of those thematic indices displayed a negative coefficient to the value factor, representing tilts toward the growth style, some of which were statistically significant (at a 95% confidence level). The exposures to the small-size factor were inconsistent and inconclusive, all with betas greater than 1.0.