Introduction: The Generative AI Revolution

The launch of ChatGPT in late 2022 marked a watershed moment for artificial intelligence, triggering what many now recognise as one of the most explosive industry growth stories of the decade. In just over two years, the generative AI market has transformed into a fundamental shift.

This rapid ascent has been mirrored in market valuations and explosive growth for AI-related companies, from chip designers like Nvidia to software/model companies like OpenAI to the hardware producers themselves. For investors who saw this emerging trend early and positioned their portfolios accordingly, the rewards have been substantial. Companies at the forefront of AI have soared, while those slow to adapt have struggled to maintain relevance.

The generative AI story exemplifies the power of thematic investing – identifying transformative trends early and building investment portfolios around them. Rather than simply following traditional sector classifications or market cap weightings, thematic investors seek to capture growth by aligning their investments with powerful, long-term structural changes reshaping our economy and society, or simply invest based on a broad and general idea of the future direction of the world.

Being a thematic investor has a few hurdles, in part a lack of modern, reactive sector classification systems that offer more than a binary yes-no industry classification for companies.

Let’s see what’s important for thematic investing, differences in investing style, and how you can use DCSC yourself.

 

The Merits of Thematic Investing: Finding Tomorrow’s Winners Today

Why even investing thematically rather than via stock picking or simply economy-broad investing like in the S&P500? And how do you do it?

 

Defining Your Preferred Industries

The first step in thematic investing is identifying industries poised for significant growth or transformation. This requires looking beyond current market leaders, both as companies and as industries, and can even be more intuitive than traditional financial investing.

When defining your preferred industries, consider the following factors:

Growth Potential: Identify industries with high projected growth rates that significantly outpace the broader market average.

Disruption Indicators: Target industries undergoing significant disruption, evidenced by new business models, shifting market share, and technological innovations.

Adoption Curves: Assess where an industry is on its adoption curve (that is, how many people/businesses use it) to balance the high potential of early-stage themes with the predictability of those in the mass adoption phase.

Competitive Landscape: Focus on industries with high barriers to entry and strong competitive advantages that can lead to durable growth for leading companies.

 

Identifying Macro Forces

Macro factors represent fundamental shifts that will play out over years or decades, often in broadly predictable ways. You don’t have to be exactly right to be successful, but sensing the general direction is critical.

Key macro forces to consider include:

Technological Innovation: Technological innovation is a primary driver of change, creating entirely new markets while disrupting existing ones. Moreover, trends in enabling technologies can precipitate more visible changes in other industries.

Demographic Shifts: Long-term changes in population, such as aging, urbanisation, and class relations, fundamentally alter consumer demand and market dynamics.

Environmental Challenges: Global issues like climate change and resource scarcity are related to and drive a huge variety of industries.

Globalisation and Geopolitical Realignment: Evolving global trade relationships, supply chain reconfigurations, and geopolitical tensions create distinct risks and opportunities for various industries. See our articles on US-China decoupling and US tariffs.

 

Connecting Industries to Macro Forces

The most powerful thematic investment opportunities often emerge at the intersection of preferred industries and macro forces. By identifying industries positioned to benefit from multiple macro trends, investors can find companies with the strongest growth potential.

For example, the robotics industry sits at the intersection of technological innovation, demographic shifts (aging workforce), and globalisation. Similarly, biotechnology companies developing gene therapies benefit from both technological innovation and healthcare trends.

With these, investors can build thematic portfolios that capture growth across multiple dimensions, rather than betting on a single trend or technology. This approach not only helps identify promising investment opportunities but also provides a framework for evaluating how durable these opportunities may be as market conditions evolve.

 

Common Investor Requirements: Balancing Growth and Risk

Different investors have varying risk tolerances, time horizons, and income needs, all of which influence how thematic investments should be incorporated into a broader portfolio strategy.

 

Risk vs. Return

Everyone knows the risk-return tradeoff, and it is no different for thematic investing. Some industries are riskier, others more stable, and the returns are normally correlated accordingly. 

When evaluating risk in thematic investing, consider these dimensions:

Volatility Tolerance: Is your portfolio able to withstand long-term volatility?

Time Horizon: Very early stage industries without immediate adoption potential are not ideal for shorter term investors, while long-term investors may be willing to take a chance on less mature industries.

Portfolio Concentration: Concentrating in high-conviction themes can drive outperformance but also increases vulnerability to sector-specific risks.

Downside Protection: Investors nearing retirement or with near-term goals should consider how to balance thematic exposure with strategies for capital preservation.

 

Growth vs. Stable Industries: Strategic Allocation

Thematic portfolios can include both high-growth and stable industries, each playing different roles in your overall investment strategy.

Growth Industries are characterised by rapid expansion, innovation-driven business models, and higher valuations. These industries typically reinvest profits into further expansion rather than returning capital to shareholders via dividends. Growth industries offer higher potential returns but come with greater volatility and execution risk.

Stable Industries feature consistent performance, established markets, and reliable cash flow. These industries typically have lower growth rates but offer predictability and often pay dividends. Stable industries balance a portfolio during market turbulence, though usually requires more capital due to low growth.

Most investors would benefit from allocation across both growth and stable industries, of course. 

 

Dividend vs. Capital Gains: Income Strategy

A key consideration for investors is whether to prioritise current income through dividends or long-term wealth creation through capital appreciation. 

Investors who have a deeper capital pool and need current income, such as retirees, often prefer the dividend route. This approach provides a steady stream of income and lower volatility. Retirees usually do not have the time to ride out down periods, especially if they rely on the income to finance their lifestyles.

Conversely, investors with smaller capital pools or more risk tolerance are likely to take the capital gains route. Because many innovative companies are in a high-growth phase and do not pay dividends, emerging and hot sector portfolios often skew toward capital gains.

 

DCSC: A New Approach to Thematic Portfolio Construction

Traditional sector classification systems have served investors for decades, but they increasingly struggle to capture today’s complex and rapidly changing economy. Companies now frequently operate across multiple sectors, develop hybrid business models, and pivot into emerging industries—realities that static classification frameworks fail to adequately represent.

DCSC (Dynamic Company Sector Classification) addresses this challenge through an innovative approach that reimagines how companies are classified. Rather than forcing businesses into rigid sector boxes, DCSC creates dynamic, multi-dimensional classifications.

 

DCSC Relevance Scores

At the heart of DCSC’s approach are its proprietary company-sector relevance scores. Unlike traditional binary classification systems that simply assign companies to a single sector, DCSC quantifies the degree to which each company participates in multiple sectors simultaneously.

These relevance scores are:

Dynamic: Updated continuously as companies evolve, launch new products, enter new markets, or shift strategic focus. This ensures classifications remain current even as businesses transform.

Multi-dimensional: Companies receive scores across numerous sectors, reflecting the reality that modern businesses often operate across traditional industry boundaries.

Data-driven: Scores are derived from comprehensive analysis of news, financial data, and company profiles/public perception.

Granular: The system stretches over four levels with over 1500 sectors for more granular mapping.

For thematic investors, these dynamic relevance scores offer a powerful advantage: the ability to identify companies with meaningful exposure to emerging themes that might be overlooked by traditional classification systems. For example, a manufacturing company developing advanced robotics capabilities might still be classified simply as “Industrials” in conventional frameworks, while DCSC would capture its growing relevance to the robotics and automation themes.

 

Portfolio and Sector Analysis Tools

Based on those relevance scores, DCSC powers intuitive portfolio construction and analysis tools.

Smart Portfolio Builder: This intuitive tool allows investors to construct portfolios based on specific sectors or combinations thereof. A variety of  filters help refine the results. The system then identifies companies with the highest relevance scores to these sectors.

Portfolio Classification: For existing portfolios, DCSC provides detailed analysis of thematic exposures, helping investors understand their current positioning relative to emerging trends. This allows for targeted adjustments to increase exposure to desired themes or reduce unintended concentrations.

Sector Performance/Risk Metrics: Investors who need ideas on which sectors to invest in can use performance and risk metrics to find stable or growth sectors with varying amounts of risk.

 

Coverage of Emerging Sectors

One of DCSC’s most valuable features for thematic investors is its coverage of emerging sectors that are often inadequately represented in traditional classification systems (usually not at all). While conventional frameworks typically take years to recognise and incorporate new industries, DCSC’s dynamic approach allows it to identify and track emerging sectors as they develop.

This includes cutting-edge areas like:

Generative AI: Companies developing or implementing generative artificial intelligence technologies across various applications and industries.

Robotics: Businesses at the forefront of robotics innovation, ever more important in markets like Korea, Japan, and Europe, where demographic shifts are demanding automation.

Niches in Medicine: Organisations pioneering personalised healthcare approaches based on genetic, environmental, and lifestyle factors.

Sustainable Energy: Companies developing next-generation battery technologies and alternative energy storage solutions.

Quantum Computing: Businesses advancing quantum computing hardware, software, and applications with the potential to transform multiple industries.

By including emerging sectors, DCSC enables investors to build truly forward-looking thematic portfolios that capture tomorrow’s growth opportunities.

 

Balancing Your Portfolio

Thematic portfolios can easily become imbalanced, with excessive concentration in specific companies, technologies, or sub-themes. This imbalance can increase volatility and vulnerability to sector-specific downturns.

DCSC’s portfolio analysis tool addresses this via the identification of missing sectors and the concentration weight of sectors, from Level 1 to Level 4.

 

Identifying Hidden Concentrations

One of the most valuable functions of DCSC’s portfolio analyser is its ability to uncover hidden concentrations that might not be apparent through traditional analysis. With 4 levels and niche sectors, it is easier to discover that a portfolio of “financial industry stocks” might actually be heavily concentrated in crypto exchanges rather than banks.

By identifying these hidden concentrations, DCSC enables investors to make targeted adjustments that improve diversification while maintaining strong thematic exposure.

 

Cross-Theme Understanding

Many thematic investors build portfolios around multiple themes, such as combining positions in robotics, artificial intelligence, and advanced manufacturing. DCSC’s visualisations help easily see how concentrated a portfolio is and enables simpler rebalancing if needed.

 

Ongoing Portfolio Monitoring

Thematic investing requires continuous monitoring as themes evolve, companies transform, and market conditions change. DCSC’s portfolio analysis tools provide ongoing insights. 

As companies grow and evolve, an investor may not realise their investments are now in more areas, especially if they’re a buy-and-forget investor.

Moreover, while not part of the portfolio analysis tool directly, the inclusion of emerging sectors in DCSC means that investors can easily find new themes to add over time. 

 

Conclusion: Capturing Tomorrow’s Growth with Confidence

Thematic investing is a powerful strategy for capturing growth from how the world is changing. Successfully identifying these long-term structural shifts, from AI to biotechnology, allows investors to position their portfolios ahead of the curve.

By using dynamic, multi-dimensional relevance scores instead of binary sector labels, DCSC helps investors build truly targeted portfolios with precise exposure to their chosen themes. The platform’s tools allow for the construction, analysis, and balancing of these thematic investments with unparalleled accuracy.

Ultimately, DCSC empowers investors, whether they want to find new growth niches, become more stable in their portfolios’ volatility, and to simply better analyse their holdings. to align high-growth opportunities with their personal risk tolerance and financial goals. 

 

Getting Started with DCSC

It’s very easy to set yourself up and start using DCSC:

  1. Create Your Account: Visit dcsc.ai to register for an account and access the platforms powerful features.
  2. Explore Thematic Opportunities via Smart Watchlists for each of our 1500 sectors.
  3. Build Your First Portfolio: Try our Smart Portfolio Builder to construct a thematic portfolio aligned with your investment goals.
  4. Analyse and Optimise: Once you have a portfolio, analyse its sector breakdown and build another version that is more balanced.

Stay Informed: DCCS is more than a few simple tools. News and sentiment are available, and every DCSC account has a CityFALCON complement, which empowers deeper research and better market monitoring.