Equity markets continue to defy expectations, but investors face mounting risks as valuations stretch to historical extremes. Hugh Selby-Smith, co-CIO of Talaria Capital, recently presented his insights at The Inside Network’s Alternatives Symposium, warning that today’s market environment demands a critical reassessment of diversification strategies.
Relax, stop worrying; you’re well-off. Australian household wealth per person is now $623,000, putting us right up there with the richest in the world. Not all may feel it, however.
Cautionary tales on thematic investing in alternatives
The conversation, held at The Inside Network’s recent Alternatives Symposium, ranged from the merits of alternatives, the challenges of implementation, and the risks of chasing trends, forming a wide-ranging debate on when thematic investing works and when it fails.
Jamie Nemtsas, director of Wattle Partners (and executive chairman of the Brilliant Investment Group, publisher of The Inside Adviser), brought the perspective of an adviser who has spent decades refining his firm’s focus on retirees. Wattle Partners, based in Melbourne, provides retail financial advice with a strong emphasis on long-term investment planning. For Nemtsas, thematic investing is simply another lens through which to view portfolio construction, though one that comes with significant risks. “We’ve been trained to talk about topics, to tell a story,” he explained. “But themes are typically short-term, and ETFs are sold, not bought. There’s always a new theme coming out, and that’s a challenge.”
Nemtsas has experienced both successes and failures in thematic and alternative investments. “Our clients have done really well with illiquid investments, particularly distressed debt and closed-end products with long-term horizons,” he said. “But healthcare, for example, seemed like an obvious thematic for an ageing client base, and yet we’ve made almost no money in it.” His key concern is sizing: “How much exposure is appropriate? If a client insists on a thematic, what’s the right allocation? No one really talks about sizing, and that’s a problem.”
Will Hamilton, managing director of Hamilton Wealth Partners, leads a wholesale-only wealth management firm that caters to sophisticated investors and business owners. His firm has been investing in alternatives for over a decade. “We believe in long-term themes,” he said, pointing to agriculture and food security as key investment areas. “We invested in farmland during the drought years when no one else wanted to. It wasn’t easy, but now those assets have appreciated by 200%.”
Hamilton warned of the dangers of concentration risk in thematic investing, particularly in areas like artificial intelligence. “AI is everywhere,” he noted. “It’s in developed markets, it’s in emerging markets, and it’s in every tech stock you already own. If you’re not careful, you end up doubling down on the same exposure without realising it.” He also raised the issue of implementation, particularly for advisers: “Clients often ask for a specific theme, but it’s our job to manage risk. If they insist, they sign something confirming it was their decision—because when it goes wrong, they need to understand why.”
Peter Johansson, chief investment officer at JCE Advisory, which specialises in alternatives and credit for financial advisory groups and family offices, provided a consultant’s view on thematic investing. “The challenge with thematics is that they come in waves,” he said. “Right now, it’s AI and energy security. There’s usually a structural tailwind, but then the product providers rush in to capitalise on demand, and that’s where the trouble starts.”
Johansson pointed out that venture capital is the most obvious example of thematic investing in alternatives, with funds dedicated to healthcare, AI, and other sectors. But in broader alternatives, he argued, the thematics are less clear. “Core infrastructure, for instance, isn’t inherently thematic, but within it, you might have an energy transition sleeve focused on renewables,” he said. “The question is always: where do you get the best value?”
The discussion also touched on how thematic investing often fails. Johansson was particularly critical of the explosion of thematic ETFs. “Most thematic investing is in equities, and the ETF space is the most extreme version,” he observed. “These funds launch at peak hype and then fade away.” He urged caution, suggesting that the best opportunities arise when a theme is out of favour. “I get more interested in a thematic when no one is talking about it,” he said. “If everyone is piling in, it’s already too late.”
Another key issue is how alternatives fit within advisory businesses. Nemtsas raised the conflict with separately managed account (SMA) providers, noting their structural preference for liquid assets. “The SMA model doesn’t work well with alternatives,” he said. “So you have this bizarre situation where alternatives are growing globally, but some advisers avoid them because they don’t fit into SMA platforms.”
Johansson highlighted the disparity between retail and wholesale offerings, which can make implementation difficult for advisers. “The wholesale side of alternatives looks very different from retail,” he said. “That creates friction because some firms aren’t set up to manage two different models within one business.” He also pointed out the over-reliance on property in family offices. “They think private credit is diversification, but if it’s all property lending, it’s not actually diversifying at all.”
Ultimately, the discussion underscored the difficulty of getting thematic investing right. Nemtsas, Hamilton, and Johansson all agreed that while themes can add value, they must be approached with caution, clear sizing strategies, and a deep understanding of risk. “You need to know when to say no,” Nemtsas concluded. “Clients don’t always like it, but that’s our job.”
