Thematic Investing in Mutual Funds
62 Pages Posted: 5 Aug 2022 Last revised: 28 Nov 2022
Date Written: November 2022
We study whether mutual fund managers gain an edge through thematic investment strategies—investing in stocks that may benefit from a particular theme. We use textual analysis of 10-K filings to identify stocks exposed to different semantic themes and measure a mutual fund’s thematic exposure concentration by value-weighting all stocks in the portfolio. We find that funds with a higher thematic concentration index (TCI) perform significantly better, with the difference in four-factor alpha between the top and bottom deciles amounting to 2.92% per annum. Fund managers’ expertise in specific themes is partly driven by their educational background, in particular the field of undergraduate study. High TCI fund managers have an information advantage regarding firms’ fundamentals, such as earnings.
Keywords: Mutual Funds, Manager Skills, Thematic Investing, Thematic Concentration, Fund Performance, Textual Analysis
JEL Classification: G11, G23, J24
Suggested Citation: Suggested Citation