When people talk about investment strategies, the conversations often revolve around approach, whether growth versus value, momentum versus buy-and-hold, and so on. Although each has its place — and can all work toward reaching specific financial goals — there are also those investment strategies that consider particular points of view, namely generalist versus thematic.

The generalist portfolio investment strategy is just as it sounds: Fund managers place investments in an undiscriminating range of sectors, often focusing on weighing success factors that have driven growth in the past. You’ll usually encounter this investment strategy at firms with more than $250 million in assets under management; at that level, it becomes possible to deploy the capital necessary to back hundreds of deals. 

In contrast, in a thematic portfolio investment strategy, managers concentrate investments within one or two sectors of expertise (either industrial or technological). These investment themes rely on a specific background or professional experience, making this a targeted, tactical method of portfolio construction. Emerging managers and micro-venture capitalists predominantly employ this strategy.

Successful thematic investing requires a manager to use a bird’s-eye view to determine the right investment theme and execute a targeted strategy therein. Without a specific investment thesis, a generalist approach tends to emerge by default. When managers aren’t looking for investments informed by long-term economic, technological, or social trends, they tend to drift from opportunity to opportunity. The approach becomes more opportunistic and reactive rather than targeted and proactive. Think of this like shopping at a supermarket without a grocery list — you end up filling your cart with what looks good at the moment and what’s on sale. 

Emerging managers who deploy capital in a generalist fashion (especially without the pedigree of an established firm) play a dangerous game. Larger, more well-established players often prevent access to popular deals, blocking the most gainful, rarified air. This can lead generalist emerging managers to invest in these companies’ dicier competitors.

Can You Diversify Your Portfolio With a Generalist Approach?

Because of the similarities in sector exposure among generalist portfolios, additional diversification can’t be achieved by increasing the number of generalist funds in your portfolio — you simply end up holding more companies of the same ilk.

Furthermore, with valuations on the rise for all stages, managers are increasingly unable to deploy capital widely enough to build sufficiently diversified investment portfolios that are fundamental to a generalist thesis. Just this past year, startup investing in the U.S. hit a record high of $130 billion. In such a competitive market, generalist portfolios end up with a smattering of startups in scattered industries — and that’s not sufficient to move upward along the risk-return frontier.

Instead, when striving for broad sector exposure beyond a single established generalist manager, efficient diversification can only be achieved by increasing allocations in thematic fund managers.

Is a Thematically Diversified Asset Portfolio a Better Option?

Oftentimes, the most successful strategy for emerging managers is to track down deals proactively that fit a targeted, well-informed thesis. Performance alone provides merit to thematic investment strategies. The thesis itself stems from experience, research, and observation as opposed to pursuing fleeting, backward-looking opportunities.

Time is spent developing a philosophy — one that explains a central principle that underlies the forces driving widespread transformation. This results in a better understanding of performance-driving factors such as competitive environment, strategic players, and customer appetites.

In our experience, a track record for identifying transformative investments early on within a targeted theme (e.g., SaaS, data exchanges, and deep tech) before established players take an interest can also lead to relationships with widely known firms. This gives emerging managers the opportunity to invest alongside these established firms, which can be of great value whether you’re the established generalist manager or emerging thematic manager.

That said, an underdeveloped thematic investment thesis could spell failure. Because thematic managers concentrate investments within one area, diversification of industry risk is low, meaning a fund could be lost to an incorrect thesis.

The Verdict: Diversify Your Portfolio With Multiple Themes

Research suggests that thematic investment strategies outperform — and for good reason. Investing in upstarts that drive the future of industries in transition holds more promise than owning a broad index of startups, the majority of which will end up failing.

Moreover, emerging managers who attempt generalist investment themes are often destined to come up short. Sophisticated investors shouldn’t select a public equities index run by emerging managers, nor should they select emerging managers to run generalist investment strategies.

Perhaps that explains the newfound interest in diversified portfolios of multiple thematic private market investors.

Limited partners should build a portfolio of funds with the right investment themes. Investing in the wrong economic, technological, or social trends could be problematic, so be selective about your choices by finding emerging managers with vision. Read and research their perspectives in established publications and check their active holdings for unicorns or “soonicorns.” Further, if multiple sequential fund vintages are backed by sophisticated family funds, the theme may hold promise.

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