Thematic Investing | The Bid Podcast ft. Jeff Shen on Finding Tomorrow's Investing Themes Today

0:00 thematic investing is gaining Traction in today's investing landscape but what exactly is thematic investing and how can investors take advantage of this new trend unlike traditional investment strategies that may focus on sectors or regions thematic investing looks at broader transformative forces such as technological advancements demographic shifts and environmental changes welcome to the bid where we break down what's happening in the markets and explore the forces changing the economy and finance

0:31 I'm Oscar Palo here to help me understand this investing trend is Jeff Shen co-head of systematic active Equity at Black Rock he'll help us understand the current themes driving investment opportunities how his team identifies and evaluates emerging themes and the role of technology in shaping the future of investing we'll also discuss the risks associated with thematic investing and key takeaways for investors looking to capitalize on these trends Jeff thank you so much for joining us on

1:02 the bid thank you so much it's great to be here Oscar and welcome back we had you on the bid back in 2023 and you gave us this fantastic history of AI artificial intelligence we learned a lot about how it's evolved over many decades and not surprisingly AI has continued to be a topic that we've covered on the podcast from many different lenses so one of the lenses in which we've covered it is how it is an investable theme that

1:30 investors can take advantage of and we want to talk about thematic investing what does that term mean to you and how does that differ from traditional investment strategies yeah that's a that's a very good question I'll say that when I think about theming investment it is really interesting in the sense that it's a creative way of thinking about investment well all of us are very very much familiar with a 5,000 Global investment universe in the in the global

2:00 Equity Market you can divide the stocks through country lens through industry or sector lens and theme is a way to think about how to look at the world a bit differently you know you talk about artificial intelligence now there's a supply chain aspect of the artificial intelligence power supply chips and overall comput Computing stack then there's also the demand side of the AI food chain if you will really think about how the Enterprises and Al consumer is going to be using AI so when

2:33 you think about this AI theme you realize that it doesn't really fit into the country or sector or industry definition very neatly and it kind of cut across that so that makes it interesting a very creative way of thinking about investment and the another aspect that makes theme investment also interesting exciting but also potentially difficult is that there's also aspect of timing a theme can come in and out of favor there could be emerging theme that nobody's thinking

3:00 about but it becomes much more dominant there could be a theme that's being overpopulated and overhyped and therefore there should be quite a bit of caution so I think there's a bit of a life cycle of a theme that makes also theme investment quite different from the traditional investment so I'll say that identifying the theme and also timing the theme are could potentially be both challenges but also opportunities and what you're describing is is very similar to when

3:29 we've spoken to Jay Jacobs about this topic where he talks about themes there are multiple ways in which to invest in a theme there are second order effects across sectors and industries and and there's a lot that has to be taken into consideration and and you can be a bit more Dynamic when you're investing through a thematic lens than maybe a strict sector or industry lens Jee when you look at the the macroeconomic landscape and and the

3:54 markets whether it's today or or recent past C can you share some examples of of current them that help bring thematic investing to life absolutely I think I mean you know we were talking about artificial intelligence this is certainly is a long-term secular theme that has certainly a life cycle of its own but it's also thinking that there are also a lot of cross-sectional thematic implications there are going to be businesses that are actually AI proof If

4:22 you will and there are going to be businesses that are actually going to be deeply impacted by the development of generative AI so there's going to going to be a bit of a long short aspect if that certainly is is a big area of focus I think there's also when you think about the development of glp1 drug the weight loss drug that's actually quite popular here both in the US and also around the globe there are

4:44 certainly implications for fast food producers there's also implications for snack producers you know by taking some of these drugs maybe the appetite for fast food or or unhealthy snack will go down so that could have a shortterm and also long-term implications and clearly given some of the news that's been been coming up in terms of President Trump's new policy and executive orders there also many interesting themes that actually come out of that deregulation

5:16 immigration geopolitics and also in particular tariffs so I'll say that theme investment is certainly all encompassing and I think there are many interesting themes as we speak right now it sounds like identif find themes is a full-time job and Jeff you're part of a systematic team of analysts and investors how do you go about evaluating themes that are that are you know really interesting to evaluate and maybe you can also start with a brief reminder of what is it mean to be a

5:46 systematic investor yeah systematic investment has been around for a long time and our team has also been around for about 40 years I've only been with a team for 20 years and but I think the way to think about systematic investment is that we use a lot of data a lot of algorithm and Technology to eventually investing Equity or fixed income across many different asset classes so think about that it's more of if you will humans are very much in

6:15 the process but machine plays a pretty significant role and when you think about artificial intelligence or machine learning these are certainly the latest techniques for us to help us to make this systematic investment decision now come back to your earlier part of the question in terms of theme identification I think this is also the place where it's it's quite interesting I think there's certainly the creative part in terms of human input what are the interesting themes or what are the

6:42 interesting topics people talk about now I like to say that we like to hire phds who don't like to read so there is a bit of a sense of using machine to read a lot of these texts whether it's broker reports conference called transcripts fincial news anything that could be helpful for us to think about a theme idea and the large language model clearly today is extraordinary powerful but we have a long history of using machine using

7:11 natural language processing to help our decision making so identifying theme today is certainly prompting the large language model to help us to think about how we can come up with additional insights and additional basket and the benefit of using the machine to do some of this work is is that you get a lot more themes I understand there are many mega themes out there but at the same time there also some micro theme today that could become a mega theme in six

7:42 months in 12 month so I'll say that's a theme investment powered by technology is really a game of diversification and it's a game of identifying many many topics and many many themes right it sounds like themes could have in some cases a longer term time Horizon of investability but when you said micro themes perhaps that could also mean that it's it's a shorter term theme but one still worth identifying and and investing in and Jee you talked about technology but

8:10 I'd like to ask you a bit more about that because you know we we've talked about things like gen and large language models and there's just so much innovation in this space and talk more about the role that technology plays in thematic investing and again that mix of man and machine that that you alluded to absolutely I would say that technology for us is certainly Central in terms of advancing the potential ability to deliver alpha or our

8:38 performance for our clients and from that perspective I I really think about it it I talk a little bit about how large language model and AI can help us identify the theme at the same time timing the theme is also very important Oscar you were just talking about you know some of the theme may be transitory some of them may be long-term and to think about the timing aspect of it the machine and Technology can help us

9:04 also quite a bit in terms of you know I can think about you know positioning is this particular position or particular theme becoming very crowded when you think about all the flows Hedge Fund mutual fund ETF flows out there that can potentially impact the apps and flows in terms of positioning of a particular theme they're also interesting to think about Market attention on a particular theme a lot of people talking about it is this headline grabbing versus not too many

9:34 people talking about it social media alongside with financial news give us a pretty good read on the sentiment of the market so these are the tools that we're using not only to identify the theme but also can time the theme now last but not not the least is also to think about once you have a theme me see theme view once you have you think it's a good time to invest in a particular theme now how do you implement that

10:01 particular theme theme view now implementation it's slightly boring I'll say at the same time extraordinary important that can make the difference between winning versus losing so we take the implementation part identifying the basket to really to think deeply about one single stock could potentially be exposed to multiple themes and how do you think about this kind of a multivariate analysis is actually all quite important risk modeling comes into place transaction costs come into place

10:33 so the implementation even though is not the most exciting topic in theme investment per se but in our mind is extraordinary important it it's clear to me that U you know just thinking back over the history of markets you know we've talked about markets through the lens of asset classes you know stocks and bonds and and and sectors like energy or or technology but this this lens of of investing through themes has become more prevalent in in recent

10:58 periods and it it sounds like there's a lot of innovation going on in the space that you and your team are are part of Jeff notwithstanding all the exciting things that you've talked about the opportunities in thematic investing and how you can leverage technology to exploit it what are some of the risks that investors should also be aware of when we're talking about thematic investing yeah I think I mean there's definitely opportunities there also plenty of challenges I'll say that I

11:24 talked about timing the theme to be quite difficult I think theme tends to be a bit Trend following if you will there is something that maybe a few people thought leaders are starting to talk about it and then there'll be more followers just think about maybe 10 years ago not too many people are talking about AI fast forward today everybody's talking about AI so I think there's certainly this kind of a trend following aspect of it and I think one

11:50 of the things that we really need to watch out for is a what what I call is late momentum trade so everybody's already on it and you get on to the last person on the bus and the bus is going to Veer off the course I think that you you better better watch out so I think that's one key risk and challenge I think the second part is also I think a lot of investors are also thinking about is where do I take

12:14 money from if I if I were to invest in thee so that's another way of thinking about is how do I Benchmark this if I'm investing in a global Equity Market universe or a US Equity Market Universe do I take it out of msci world do I take it out of my S&P 500 exposure and if so would the theme investment while in itself can be interesting exciting but would it really outperform MSI world or or or the S&P 500 over short term

12:46 or long term so I think benchmarking is also quite quite important and the last but not the least is implementation so so implementation is clearly a big challenge you can have a great idea but when it come comes down to portfolio construction putting the investment into work I think there are many many details that you got to get it right so that's also another challenge right so just identifying the theme what is that and what are the

13:13 companies to own implementing that theme you mentioned that that's that's an important piece of the puzzle as well timing not only when to get into the theme but also when to get out and has it run its course and then you also mentioned sourcing which is if you're invested in the market and you want to invest in themes what what am I selling in order to invest in the theme so all all important considerations to take in to take

13:38 into mind Jeff what takeaways should investors have for those who are interested in incorporating more thematic investing into their portfolios what should they be considering and and what should they be looking ahead to in terms of Trends yeah I think I mean I'll say that I I think first and foremost I think theme investment is here to stay I think it's extraordinary exciting way of thinking about the world yeah if anything it's also a creative way of thinking about investment so I

14:06 think this is maybe a little bit of my liberal arts Roots come through that I think it's actually it's quite important to think about this as a creative way of thinking about investment and so that being said I think it's also very important to think about how do we identify theme through this kind of a new technology it turned out to be that I think rather than concentrate on the themes I think there is a lot of room if you use the

14:33 right technology to potentially broaden the potential theme investment so I think there's a potential for diversification for theme investment and the second part of of theme investment I think is quite important is that knowing there is a bit of a trending aspect of theme investment knowing there's a danger of late momentum trade I think it's very important to time these trades very carefully a particular economic theme can be very much right over the long run but at the same time

15:04 the timing of it is quite important and the last but not not least is that implementing it with a sense of perfection if you will this is actually this is not a a place to be loose this is a place that you want to be very tight in implementation and I think if you get some of these things right I think you're going to have the creative part but also get get the potential strong investment results

15:28 from this type of way of investment we've definitely talked about this is a new market regime you need to be more Dynamic and you need to be a little bit more granular in how you approach the market so it sounds like thematic investing helps you do that Jeff one of the themes of having you on the podcast is we learn a lot we've learned a lot about Ai and we've learned a lot about how to look to look through look to the

15:49 market through a different lens so thank you for educating us on that and thank you for doing it here on the bid thank you so much for having me great to be here thanks for listening to this episode of the bid subscribe to the bid wherever you get your podcasts