Stockholm (HedgeNordic) – The year 2020 certainly has thrown a giant global curve-ball on any plans that were created in the first quarter, not least in how fund manager selectors are working but also what sectors they see as having a bright future as a result of or in spite of the pandemic.
Gilles Lafleuriel (pictured), Head of Real Assets and Alternatives within Nordea Asset Management’s manager selection team, said Covid-19 has shifted the discussions with both existing and potential new managers. It has also offered an opportunity for him and his team to examine how various managers have coped with the impact and fall-out of the pandemic, sector by sector.
Not having the ability to arrange site-visits is not ideal, he said. “Being able to experience the work-place atmosphere and interact with the team is invaluable. The spontaneity and elements of surprise are gone in video-conference meetings. Some managers have proposed a tour of their offices with their laptop but the desks are also empty now, we just have to accept the situation,” he explained.
It has become important to ask questions in a different way and probe how companies have managed the impact of the pandemic and what specific actions were taken, or how they coped with perhaps shutting down operations in order to stem the blood flow, he said. “We ask more specifics about business continuity plans i.e. which steps they have in place in case of an operationally disruptive event, such as the Covid black swan,” Lafleuriel added.
In terms of sectors Lafleuriel explained what him and his team focuses on and the rationale behind selecting one over another.
“There are basically two types of core infrastructure assets. Some have revenues that rely predominantly on volumes, they do well when the economy – i.e. the GDP – does well. These types of assets, or sectors, were obviously hit hard as was the general public. Airports are the obvious example, with the travel bans and restrictions affecting not only the traffic but also all services around air travel such as restaurants, cafes and shops in airports which account for about 40% of the airport revenues on average,” Lafleuriel said, adding that all transports took a hit and are expected to recover slowly as restrictions are being lifted.
In discussions with managers in the affected sectors Lafleuriel is taking a cautious approach and is not only looking at pricing and fundamentals but also scouring for other sectors that have a better outlook. His team monitors a portfolio made up a number of funds which have limited exposure to GDP-sensitive assets. The majority of the underlying assets derive their revenues from long-term contracts or regulatory frameworks that remunerate the assets on their availability, not their output. They are less cyclical and more resilient to the recent types of shocks. One such sector is renewable power, which typically benefits from a power purchase agreement (PPA) that improves the predictability of the future operational cash flows, Lafleuriel said.
He said that of course there are risks in these assets too should the pandemic continue for the foreseeable future. “They continued to be operational and only had minor hiccups in the early days of the lockdown when they were figuring out what was the safest way for the staff to continue operating the power production and distribution facilities”, Lafleuriel added.
The big guys need to start re-inventing themselves and check their smaller competitors, who are coming with great ideas.
Lafleuriel is praising the emergence of new infrastructure managers. Even if some of them are too small or too young to stay on his radar, Lafleuriel is always keen to meet with new managers and listen to their ideas. “The big guys need to start re-inventing themselves and check their smaller competitors, who are coming with great ideas,” he said, adding that opportunistic strategies are not entirely excluded as long as the strategy is backed by some form of track record.
Lafleuriel is very familiar with the energy sector from his background as an engineer working in the utility sector before switching to finance. “Renewable power is on top of the agenda of most institutional investors, as they are keen to enhance their ESG profile and therefore are replacing traditional assets with more sustainable ones, “ he said.
ESG remains at the core of Nordea Asset Management’s manager selection. It is the one area where there is no wiggle room whereas other criteria can be more open depending on asset classes and products. Lafleuriel, however, said that building an entire portfolio of renewable power is not ideal. The lack of diversification and concentration on power price risk in particular can be highly detrimental to a portfolio, Lafleuriel explained. “But a sustainable portfolio can be achieved by bundling renewable assets with social and smart infrastructure, and even traditional assets that aim to operate more sustainably,” he said.
Going forward Lafleuriel and his team are investigating digital infrastructure as an area which will continue to prosper as the sector grows. “This includes telecommunication towers, fibre networks as well as data centres,” he said, adding that the sector is booming on the back of today’s megatrends such as digitalisation and urbanisation and consequently homeworking which Covid-19 has strengthened.
Here one of the issues is that supply is having a hard time keeping up with demand leading to relatively high prices, in particular for operational assets. “Covid has been a turning point and we are seeing highly professional and specialised managers in this sector. We see more value in new projects than in operational assets. The owners of brownfield digital assets are enjoying a sellers’ market,” he said.
The timberland asset class is offering a unique flexibility as the trees can be cut and sold when the market-demand peaks or stored in down periods. It is also and obviously green by nature.
Another area that his team is exploring is Timberland. “Investing in timberland is owning and managing a property on which forests grow, adding that wood is by nature ever-growing irrespective of what the stock market or the economy does. Furthermore, the timberland asset class is offering a unique flexibility as the trees can be cut and sold when the market-demand peaks or stored in down periods. It is also and obviously green by nature,” he said.
Lafleuriel’s team is careful in the fund selection process and would therefore only consider funds that invest in properties that are certified by PEFC, FSC or the NGO Leading Harvest. Those certifications pay close attention to the forest management practices and the impact on the entire eco-system where the property is located. Prohibition of harmful pesticides, zero deforestation policy and friendly interactions with local communities are critical among many other sustainability criteria. Of course, from a pure financial perspective, timberland also offers very attractive and stable returns over the longer-term that appeal to institutional investors, he said.
From a general standpoint, Nordea Asset Management’s selection process typically includes an assessment of the investment team, their track record of realised and unrealised performance, their ability to retain key staff, the investment philosophy behind the strategy and how repeatable and structured the process is to ensure its implementation.
As Dorothy Parker, the American poet, said creativity is a wild mind and disciplined eye. Creativity within the real asset space certainly is key to getting new managers on Lafleuriel and his team’s radar, and staying there, irrespective of size. The current pandemic has shown just how much can be achieved when we use our collective creativity to deal with the unexpected. It would of course be better if the environment for new ideas and solutions, not only in investments, would be such that we would not need a trigger with such tragic consequences as Covid-19 to spur us onwards and upwards.