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MSCI/thematic indices: Chinese megatrend bets are mega broad

Back to front as it sounds, MSCI is following the money. The global securities index publisher has launched a deck of indices allowing both domestic and international funds to track Chinese megatrends.

In the normal course of events, funds follow indices. Some $14.5tn worth of funds benchmark MSCI indices alone. But thematic investing that focuses on long-term trends rather than specific companies or sectors is already popular. About $100bn of ETF assets were in thematic funds at the end of the third quarter, along with $300bn worth of mutual funds, according to Morningstar. In China, more than half the passive funds offered onshore were thematic, says Z-Ben, a Shanghai consultancy.

Investing in megatrends thus sounds like a mega no-brainer. But there are a few cavils. Megatrends, almost by definition, are backward looking. Those themes targeting robotics or renewables, say, are attached to growing markets but ones that are at least partially reflected in share prices. China’s smart cities — the subject of one MSCI index — continue to proliferate but have already enjoyed a decent ride. Even in 2018, local consulting firms (perhaps bullishly) reckoned the market was worth $1.1tn.

They are also extremely broad categories. Even narrow sounding funds have expansive remits: a fund invested in batteries could span itsy Peruvian miners to $676bn market-valued Tesla.

MSCI, which includes companies deriving at least a quarter of revenues from the selected theme, demonstrates the breadth. Its Accelerated Change benchmark, hatched in the early days of the pandemic, ranges from tech to biotech to clean technology. The China autonomous technology and industrial innovation index includes companies best known for search engines and ecommerce. 

By allying with Beijing’s strategic goals — all set out around five-year plans — MSCI’s Chinese versions may at least avoid the fate of more fad-driven thematic funds, which often struggle to sustain initial stellar outperformances. In their place comes political risk that could chafe with more ESG-focused investors, particularly in the US. Sino-US tension is, after all, another megatrend.

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