Beyond 60/40: Thematics - Investing in the new economy

By Jayson Forrest

Chad Hitzeman (Global X), Hugh Lam (Betashares), and Michael McCorry (BlackRock Investment Management) consider how thematic and alternative investments can be used to enhance the framework of a traditional portfolio.

As an asset class, alternatives are used primarily for three main reasons:

1. To generate returns that are different to equities and bonds, particularly during challenging cycles;
2. To broadly diversify the portfolio, including generating returns that are slightly outside the normal risk-adjusted returns that investors receive from equities and bonds; and
3. To create portfolios that lower correlation and portfolio volatility.

Although Daniel Stojanovski — Chief Investment Officer at Ventura Funds Management and Asset Consultant to Centrepoint Alliance — acknowledges investors can create portfolios without allocating to alternatives, given the characteristics these assets bring to a portfolio, he believes alternatives should be considered by advisers and clients when building portfolios.

“Alternatives are meant to deliver the same type of risk-and-return characteristics as other asset classes, but do lower the overall volatility and correlation in portfolios,” says Daniel. “And on the thematic side, depending on the type of portfolio you have and your investment objectives, that’s where thematics can provide an edge from a portfolio construction perspective.”

Joining Daniel in a discussion on the topic of ‘Investing in thematic and alternative investments’ as part of an IMAP webinar series titled ‘Beyond 60:40 — Delivering portfolios for clients with different goals’, Hugh Lam, CFA — Investment Strategist at Betashares — agrees there are a range of investment exposures that sit outside the traditional asset classes of equities and bonds. These include long-short funds, short bias funds, commodities, real estate, and infrastructure, which all sit under the alternatives umbrella.

He adds that thematic investments can also provide structural growth drivers to subsets of the ‘new economy’ — like artificial intelligence (AI), data centres, cybersecurity, and defence. These thematics have increasingly become popular, as investors seek exposures beyond the traditional framework of a 60/40 portfolio.

“The role these exposures play within portfolios can be drilled down to a couple of things,” says Hugh. “Firstly, to reduce risk within a more diversified portfolio. Typically, alternatives and thematic ETFs have lower correlations than your traditional equities and bonds. So, when you add that to a 60/40 portfolio, you can reduce the overall level of portfolio volatility.

“And secondly, these exposures can provide a portfolio with capital growth. A very strong investment thematic, like cybersecurity, can generate consistent returns for the investor. So, when you combine both risk-mitigation and volatility reduction, as well as capital growth, you can really enhance the risk-adjusted returns of a portfolio.”

However, Hugh cautions that thematic and alternative ETFs shouldn’t make up a whole portfolio. Instead, Betashares advocates that thematic and alternative ETFs should be used as a satellite allocation of about 5-10 per cent, depending on what sort of exposure an investor wants.

“When you are considering adding something like gold, commodities, infrastructure or a thematic ETF, it’s important to do your homework,” says Hugh. “See what the level of correlation looks like to your core equity/bond exposure, and understand what risks you’re bringing into that portfolio by allocating to alternatives. For example, does adding private equity make sense if you’ve already got a substantial equity exposure within your portfolio?

“And with bonds, there’s also duration risk. So, if you’re adding something like an alternative bond proxy, does that make sense from a risk factor-based perspective?”

Overall, Betashares believes a good investment strategy consists of having broad market cap beta as the core, and then utilising thematic and alternative exposures as satellites to help enhance the risk-adjusted returns of the portfolio.

And while Hugh accepts that illiquid investments, like private markets, have increased in popularity over recent times, he believes there are structural issues with private equity and private credit ETFs, pointing to the mismatch between the liquidity of the ETF wrapper and the underlying assets.    

“If Betashares was to launch a product within the private markets space, we would have to ensure the liquidity of that vehicle (the ETF wrapper) aligns with the liquidity of the underlying investments. So, something like an interval fund structure might make a bit more sense, providing investors with frequent redemption gates that they can rely on — whether that’s quarterly or six-monthly.”

Chad Hitzeman — Head of Institutional Sales at Global X — is bullish on the role that thematic and alternative ETFs can play in a portfolio. Some of Global X’s best idea for constructing portfolios using alternatives, include thematic equity ETFs for growth portfolios and using ‘liquid diversifying ETFs’, such as gold, for a variety of investment risk profiles.  

When thinking about thematic opportunities, Chad believes it’s important to consider where the opportunity sits on the adoption curve (similar to a bell curve, it represents how markets embrace thematic opportunities, like AI). For example, emerging thematics — like hydrogen, blockchain, and autonomous and electric vehicles — are at the lower end of the adoption curve. Typically, these are more nascent industries that have yet to prove their commercial viability.

In comparison, more mature thematics — like social media, and cloud computing — are positioned at the top-end of the thematic adoption curve. By moving along the adoption curve, it means the thematic has growing markets.

According to Chad, thematic ETFs allow investors to step away from broader investable universes — like the MSCI World and S&P 500 — to target equity areas that are tail-winded by growing markets, like cybersecurity and AI.

“Clients should invest in thematic ETFs because indices, such as the MSCI World, can under-represent companies connected to developing structural change, like energy transition,” he says. “Also, by using a diversified ETF, rather than single stocks, thematic ETFs amplify the degree to which a growth/high growth portfolio can seek alpha.”

Global X also likes the strategy of using ‘liquid diversifying ETFs’, such as gold, for constructing portfolios using alternatives. Chad says such a strategy enables investors to incorporate non-correlated listed liquid precious metals into a portfolio.

“Liquid diversifying strategies allow investors to incorporate alternative asset performance properties into a portfolio without introducing illiquidity.”

Global X has run a gold ETF for over 20 years, and over that period, gold has had negative correlation to broad equity universes, like the MSCI World. In fact, it has been more negatively correlated to domestic equity universes, such as the ASX 200.

“As a strategy, pairing gold with equities can be a good diversification approach for investors. Historically, gold has been a ballast in minimising drawdown during equity dislocations,” says Chad. “In 2025, gold is up about 20 per cent, while equities (MSCI World) is down around 5 per cent. So, gold has been working as an equity diversifier this year.”

There’s no doubt the world has moved into uncertain times. Trade tariffs, supply disruption, and a change in global alignments have all contributed to greater market volatility. Michael McCorry — Chief Investment Officer at BlackRock Investment Management (Australia) — believes we’re seeing a change in the world order.

Against this backdrop, Michael believes that when it comes to investing, what has worked in the past, won’t necessarily get the same results going forward. This requires advisers to think differently about portfolio construction. He refers to modelling by BlackRock which shows that traditional portfolios are unlikely to meet their objectives, with materially lower returns and higher volatility expected for 70/30 portfolios over the next 10 years.

“We’re in a higher volatility regime, where earnings are stretched,” says Michael. “Valuations are high in equities, we’ve got tariff-driven inflation, and slowing economies. Looking forward, our capital market assumptions are saying that things are going to be more subdued.”

In a challenging market environment, Michael believes alternatives (like hedge funds) are well placed to provide the earnings growth that investors are seeking. While he acknowledges that most alternatives lack liquidity, he believes hedge funds can deliver uncorrelated returns, daily or monthly liquidity, lower volatility than equity markets, and provide good ballast for portfolios.

“At BlackRock, we’re big fans of market neutral, multi-strategy hedge funds,” says Michael. “Hedge funds offer investors high returns, lower risk, and high liquidity.”

Michael says by using a market neutral, highly diversified, multi-strategy hedge fund with daily liquidity, advisers can effectively push out the Efficient Frontier (stocks and bonds) and achieve higher levels of return for the same amount of risk, or lower risk for the same level of return. “So, naturally, we’re big fans of liquid market neutral hedge funds.”

When building a portfolio that includes an allocation to thematics and alternatives, Hugh believes

it’s quite difficult for individual investors to select “winning” stocks that are exposed to a particular thematic. He believes if investors are doing that, they are exposing themselves to idiosyncratic risk.

Instead, he believes by choosing a thematic ETF — like Asia technology or cybersecurity — investors can get a basket of these companies that the manager has already extensively researched with the index provider. “This allows investors to get low cost access to structural growth drivers within a particular area. Thematic ETFs are allowing investors to access a broad selection of opportunities in the new economy.”

For its larger clients — whether that’s an institution or a wealth firm — BlackRock is happy to be led by the client in relation to their investment preferences. Once it determines what it is the client wants, BlackRock then works with the client to find the right solution, which might be a thematic ETF or something they want actively managed within the portfolio.

“We don’t really want to lead the client,” says Michael. “Instead, we carefully listen to our clients about their investment objectives. I think advisers have a huge role to play in this space, by getting to know their clients and understanding the client’s investment objectives. And that’s where we can help by providing solutions that meet the client’s needs.”

Chad agrees that adding thematics to a portfolio can be an expression of investment preference, which should be client led.

“When it comes to investing, some clients are already making decisions based on their preferences, such as active or passive manager selection. I think it's helpful to open up thematic selection to clients,” he says. “The other positive benefit of using thematic ETFs is you don’t have what’s referred to as ‘drift’. So, if you’re going into a semiconductor ETF, you know that’s exactly what you’re invested in. Whereas an active manager might shift or change course with their allocations and investment selection.

“For risk profiles that are growth and high growth, we think it makes sense to have a little more aggression in how you approach the equity side of a portfolio, and thematics is one way to do that.” 

Over recent years, investors have seen issuers release many thematic products within the market, but are these genuine investment opportunities or just fads?

“It’s a great question,” says Michael. “Everything we do in investing is forward-looking, which includes looking at structural trends and likely themes in the market. For example, cybersecurity isn’t going away any time soon, and will only become more important as AI becomes increasingly prevalent.

“When thinking about thematics, it’s about looking at the future and identifying real trends. And when thinking about illiquid alternatives, it’s important to carefully think about who you’re investing with. That’s because on the illiquid side, the active management team and the asset selection process is very important.”

Michael adds that advisers need to choose a manager with a proven track record, good transparency, and an investment team with excellent governance. They also need to ensure the manager has the ability to work with advisers, so they can suitably inform the end-client about what’s happening with their investments. 

Hugh agrees, adding that for advisers looking at the viability of a thematic product, there are some key metrics they should consider. These include:

* ascertaining whether there are capital flows going into the product;

* the likely future trajectory of the investment and theme;

* product performance;

* transparency of the product, particularly in relation to the underlying holdings; and

* the overall quality and experience of the investment management team.

“Advisers can use these metrics to assess the suitability of a thematic. Also, they should look online to see where spending is occurring. For example, global defence is a strong thematic, with the German government alone spending billions of euros more on defence, which benefits global defence ETFs,” says Hugh.

According to Hugh, what has fuelled the bull run in the S&P 500 over recent years has been the narrative around AI, which has been driven by capex spending of the ‘Magnificent Seven’. He believes the effects that AI will have on the broader economy will be significant, and is certainly a key thematic.

However, looking ahead, he also identifies some other areas of the new economy, which he believes remain underappreciated by investors. This includes software providers and cloud computing companies that might be able to benefit from the productivity gains that cheaper, more efficient AI models can bring to market.

“Software companies that can leverage the potential of AI is an area that is not well-known by investors. I also think that over the next 5-10 years, we’ll see the benefits of AI play into manufacturing. In China, we’re already seeing an influx of robots that act like humans within electric vehicle factories. So, China is already manufacturing cars using humanoids,” says Hugh.

“The outlook for the AI space is huge, and as this type of technology improves, we’ll see more countries adopt AI. I believe this is an opportunity that is currently underappreciated by investors.”

Michael also considers hedge funds to be greatly underappreciated by investors, particularly in relation to accessing daily liquid, low risk, and low cost versions of hedge funds.

With ongoing geopolitical tension and the U.S. encouraging countries to increase military expenditure as a portion of their GDP, Chad points to defence technology as a definite growth thematic and opportunity for investors.

“The U.S. is seeking to share the burden of military spending with its allies. These countries will have to go down a path of building out their military capability somewhat more. And while there are ESG considerations to take in for some investors, it certainly looks like military expenditure is here to stay.”

Chad Hitzeman is Head of Institutional Sales at Global X;

Hugh Lam, CFA is an Investment Strategist at Betashares; and

Michael McCorry is Chief Investment Officer at BlackRock Investment Management (Australia).

They spoke on the topic of ‘Investing in thematic and alternative investments’ as part of an IMAP webinar series titled ‘Beyond 60:40 — Delivering portfolios for clients with different goals’.

The session was moderated by Daniel Stojanovski — Chief Investment Officer at Ventura Funds Management and Asset Consultant to Centrepoint Alliance.