A similarity of characteristics suggesting a relationship.

Thematic investing involves building portfolios in order to capitalize on secular trends. Rather than investing in a single sector, such as financials, thematic investing offers focused exposure to a strategic opportunity that can cut across several different sectors. For example, the current Tech adoption boom has benefitted companies not just in the Information Technology sector (like Apple or Microsoft), but also Communication Services (like Netflix, Google and Facebook) and Consumer Discretionary (like Amazon). 

By splitting companies into their component business risks, stocks that have affinities to (or relationships with) a particular theme can be identified. Syntax® Affinity™ is an online portfolio analysis suite which can be used to quantify exposures to economic sectors and secular themes by breaking down each company into its associated business risks. This enables a portfolio to be viewed through multiple lenses. For example, using the Affinity lens, the FAANG portfolio in Figure 1 clearly aligns with technology risk.

Figure 1. Characterizing the FAANG companies: GICS versus Affinity

Affinity addresses a shortcoming with industry classification systems such as GICS (Global Industry Classification Standard) that are used to construct many thematic index products. GICS designates a single industry code to each company, even though the company may have a wide array of products and be exposed to many different business risks.

Unlike GICS, Affinity uses a Functional Information System (FIS™), a standardized method for classifying companies. In Affinity, each product line is tagged with a standardized set of detailed codes relating to its product type, supply chain and customer groups. For example, Amazon (AMZN) is broken down into Amazon.com, Amazon Marketplace and Amazon Web Services and each of these products is classified separately (Figure 2). It is clear from the tags that all three of Amazon’s largest product lines have technology related business risks.

Figure 2. Classifying Amazon’s Business Risks using FIS

Indeed, the three most correlated stocks with Amazon in the S&P 500 are Microsoft, Google and Adobe, so it has tended to trade more like a technology than a consumer company. Classifying Amazon as just a Consumer Discretionary stock is potentially dangerous as investors with AMZN in their portfolios may be far more exposed to Technology business risks than they think.

Classifying the attributes of a company using FIS tags allows Affinity to query an investment universe, such as the S&P 500 or MSCI EAFE and determine which companies have exposure to the specified theme.

For example, to acquire a broad-based technology exposure, one could screen stocks that directly produce software or hardware products or have a product which is used in IT. The user can keep adding rules to narrow or broaden the scope of the query (Figure 3).

Figure 3. Affinity uses the FIS Query Language

The above query found 95 US large-cap companies with Technology related business risks across six different GICS Sectors. It also excluded many non-tech companies in the S&P 500 Communications Services sector, which includes media companies like Fox, Viacom, and Disney that have a low correlation to technology stocks and have underperformed the index over the past five years. The average media stock went down 3.7% over the past year, whereas the rest of the Communications Services sector went up 13.7%.

The clean, yet broad-based technology exposure delivered stronger performance over the past five years than the average stock in the GICS Information Technology or Communication Services sectors (Figure 4).

Figure 4. Performance of Technology Thematic stocks versus GICS sectors

Investors looking to make a play on technology would do well to discern the different business risks of each individual stock to determine whether they will benefit as the technology theme plays out, rather than just buying the entire Information Technology and Communications Services sectors. Affinity data is designed to help them do precisely this.

Themes are not always positive for companies. Amazon’s innovation has been a headwind for brick and mortar retailers. Affinity can easily be used to identify companies outside of the Consumer sectors with significant exposure to that theme, perhaps to be excluded from a portfolio or even shorted.

Figure 5. Brick & Mortar Retail Affinity query

As was the case with the Technology thematic, the companies exposed to the Brick & Mortar theme can be found in many different sectors. The majority are in the Consumer Staples or Consumer Discretionary sectors, but we also see Mall Operators in Real Estate, Point of Sales Terminals in IT and sector specific retail companies, such as CVS in Health Care. Outside of the traditional consumer universe, Affinity suggests five companies have significant Brick & Mortar exposure in the S&P 500 (Figure 6).

Figure 6.Results of Brick & Mortar exposure query

The headwind that the Brick and Mortar retail exposed Real Estate companies have faced since the online shopping trend has driven consumers away from shopping malls can be seen in their performance over the past five years. The four REITs in Figure 6 went down 5.1% in the last five years on an annualized basis, whereas the average REIT rose 4.0%. CVS also underperformed its sector, losing 7.9% (annualized).

Affinity can identify dozens of thematic exposures, including Technology, Tourism, Retail, ESG, Infrastructure, Commodities and many more. Each theme includes granular sub-themes, like Agriculture or Fossil Fuels.

With hundreds of product categories and myriad business functions, the thematic possibilities permutations are endless. If a theme can be described, it can be built in Affinity, and investors can focus exposure to their desired investment theme.

Past performance is no guarantee of future results. Performance of the Affinity Technology thematic and Brick & Mortar Real Estate companies index is hypothetical and has been calculated by Syntax, LLC. Charts and graphs are provided for illustrative purposes only. 

Syntax®, Stratified®, Stratified Indices®, Affinity™, Stratified-Weight™, Stratified Benchmark Indices™, Stratified Sector Indices™, Stratified Thematic Indices™, and Locus® are trademarks or registered trademarks of Syntax, LLC and its affiliate Locus LP. FIS™ is a trademark of Locus for Locus’ “Functional Information System.”

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown.  

This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this factsheet has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof.  While such information is believed to be reliable for the purpose used in this factsheet, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

Certain information contained in this document is non-public, proprietary and highly confidential and is being submitted to selected recipients only. Accordingly, by accepting and using this report, you will be deemed to agree not to disclose any information contained herein except as may be required by law. This document and the information herein may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of Syntax. Distribution of Syntax data and the use of Syntax indices to create financial products requires a license with Syntax and/or its licensors. Investments are not FDIC insured, may lose value and have no bank guarantee.