Thematic investing : grouping companies along their technology profiles

Jaggi, David; Posth, Jan-Alexander; Guderian, Carsten C.

Publication type:	Conference poster
Type of review:	Peer review (abstract)
Title:	Thematic investing : grouping companies along their technology profiles
Authors:	Jaggi, David Posth, Jan-Alexander Guderian, Carsten C.
et. al:	No
Conference details:	R&D Management Conference, Stockholm, Sweden, 17-19 June 2024
Issue Date:	19-Jun-2024
Language:	English
Subject (DDC):	332.6: Investment
Abstract:	Thematic investing refers to an investment strategy focusing on long-term trends by detecting and subsequently investing in those innovative companies that are at the forefront of upcoming technological trends (Bérubé et al., 2014). The established method used by finance professionals is to identify those companies via qualitative assessments or via sector classifications (Bhojraj et al., 2003). Due to the established link between innovations, (new) technologies and patents (Jaffe, 2000; Lerner, 2002), recent thematic investing advances rely on patent information (Von Brevern, 2018; Von Reuss, 2021; Guderian et al., 2023). However, there seems to be a mismatch between business sector- and technology-based classifications (Preschitschek et al., 2013; Gkotsis et al., 2018). This disconnect has severe consequences when (1) trying to correctly assess which technologies companies are active in and when (2) trying to group companies of similar technology profiles to form thematic investing portfolios. We propose a novel approach to cluster companies based on their technology profiles that addresses the above-mentioned challenges. Using business classification systems common in the financial industry for thematic portfolio constructions that are supposed to be based on these companies’ technological potentials seems to be suboptimal (Lybbert/Zolas, 2014; Kelly et al., 2021). Well-established business classifications such as the GICS or TRBC classify companies based on their business activity. Consequently, business classification systems provide enough proxy information for the businesses that these companies are conducting but not for the forward-looking technological development paths that these companies have committed to in their innovation efforts. While concordance tables exist to match (1) between different industry classification standards and (2) between different patent classification standards, there are also (3) some mappings translating industry classifications and their respective patent classifications (Van Looy et al, 2015; Goldschlag et al., 2020). However, these are often relatively high levels of abstraction and insufficient to capture complex technology profiles in individual or best fit business sectors. Consequently, we hypothesize that relying on industry classifications only to form technology-driven thematic investing portfolios may lead to unfocused portfolios. With our manuscript, we provide an overview of the industry classification standards like GICS and TRBC and the different patent classification standards like CPC and IPC based on two exemplary GICS sectors “Health Care” and “Industrials”. Subsequently, we analyze the patent portfolios of the companies attributed to these sectors via the S&P Sector Index definition. The analysis is conducted on the sector index definitions sourced from LSEG, formerly known as Refinitiv, and patent data provided by LNIP. Our analysis examines the CPC 4-digit patent attribution profile vector of the companies in these sector portfolios and compares them via the cosine distance metric to calculate their similarity (Jaffe, 1986; Jaffe, 1989). We use clustering K-Means to group companies of minimal distance into clusters and compare these to the S&P sector portfolios (Gkotsis et al., 2018). We employ artificial intelligence tools like ChatGPT-4 to identify names for these newly generated clusters to ease comparability (Deng/Lin, 2022). The interpretation of the results is supported by a Sankey diagram analysis (Riehmann et al., 2005) and a network graph analysis (Wang et al., 2014; Brennecke/Rank, 2017). The findings from our study highlight three key contributions. Firstly, the behavior of the “Industrials” and “Health Care” sectors differs significantly, with technology profiles in “Health Care” aligning more closely with the GICS sector definition than those in “Industrials”. This conclusion is supported by an analysis using Sankey diagrams. Secondly, companies within the “Health Care” sector have on average a higher degree of similarity to each other compared to companies within the “Industrials” sector when considering their technology profiles. The network graph analysis provides strong evidence for this observation through its statistical measures. Third, while some sector-cluster attributions are well-aligned, others are not. We see substantial migration of companies between the GICS sectors and our technology-driven clusters. These contributions yield valuable implications for various decision-makers involved in thematic investment, including investors, corporate management, and policymakers.
URI:	https://digitalcollection.zhaw.ch/handle/11475/31133
Fulltext version:	Published version
License (according to publishing contract):	Licence according to publishing contract
Departement:	School of Management and Law
Organisational Unit:	Institute of Wealth & Asset Management (IWA)
Appears in collections:	Publikationen School of Management and Law

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Jaggi, D., Posth, J.-A., & Guderian, C. C. (2024, June 19). Thematic investing : grouping companies along their technology profiles. R&D Management Conference, Stockholm, Sweden, 17-19 June 2024.

Jaggi, D., Posth, J.-A. and Guderian, C.C. (2024) ‘Thematic investing : grouping companies along their technology profiles’, in R&D Management Conference, Stockholm, Sweden, 17-19 June 2024.

D. Jaggi, J.-A. Posth, and C. C. Guderian, “Thematic investing : grouping companies along their technology profiles,” in R&D Management Conference, Stockholm, Sweden, 17-19 June 2024, Jun. 2024.

JAGGI, David, Jan-Alexander POSTH und Carsten C. GUDERIAN, 2024. Thematic investing : grouping companies along their technology profiles. In: R&D Management Conference, Stockholm, Sweden, 17-19 June 2024. Conference poster. 19 Juni 2024

Jaggi, David, Jan-Alexander Posth, and Carsten C. Guderian. 2024. “Thematic Investing : Grouping Companies along Their Technology Profiles.” Conference poster. In R&D Management Conference, Stockholm, Sweden, 17-19 June 2024.

Jaggi, David, et al. “Thematic Investing : Grouping Companies along Their Technology Profiles.” R&D Management Conference, Stockholm, Sweden, 17-19 June 2024, 2024.