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Smart city funds are surfing mega trend waves

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Demand for technology funds has stepped up amid the coronavirus outbreak and offered support to niche players in the market – such as smart city funds.

Among the portfolio managers that currently offer these funds are Pictet Asset Management, Amundi Asset Management, Blackrock, Ostrum Asset Management and recently also Lyxor Asset Management.

Total assets under management in technology funds across Europe stood at €78.3bn as of April 2020, and grew by €6.4bn compared to all of 2019, according to US research and consulting firm Cerulli Associates (see graph below).

When other sectors fell into deeply negative territory, European-domiciled funds with a large allocation to the high-tech sector delivered a staggering 89.7% in June 2020, according to Morningstar data (see graph below).

Source: Morningstar

Lukas Neckermann, managing director of Neckermann Strategic Advisors, commented: “In general, the crisis is an accelerator of trends.

“It has rewarded resilient companies and digital-first approaches.”

Impact on smart city investments

The Ostrum Euro Smart Cities fund, launched in 2008 and revamped in November 2019, achieved -0.67% from March to end of May. It outperformed its benchmark, the MSCI EMU Index which returned -7.67% over the same period.

The thematic equity fund, with €25.1m of assets under management, invests in innovative companies which develop the cities of tomorrow and are related to the mega trend ‘urbanisation’.

Kenneth Lamont, senior analyst, manager research for passive strategies at Morningstar, said: “The Ostrum Euro Smart Cities fund has been the best performing of these [smart city funds] year-to-date. Although it has been comfortably beaten over three, five and 10 years by the Pictet fund.”

Lamont recommends, however, to not compare funds with each other, as the Ostrum fund invests in Eurozone stocks while the others hold global stocks.

“Versus the MSCI EMU benchmark, the Ostrum fund has been overweight tech (+4%), real estate (+16%) and industrials (+23%) since the beginning of the year.

“But it is stock selection within these categories that has driven relative returns. For example, an overweight to Dutch electronic payment firm Adyen, which has benefited from the surge in online payment over the covid period, has paid off for the fund,” he explains.

Florent Eyroulet, portfolio manager at Ostrum Asset Management, told Expert Investor that he increased small and mid caps and other stocks, for example, INWIT (Italian Wireless Infrastructures), a telco infrastructure business, which benefits from 5G development.

“This crisis is pushing for more digitalisation; it’s one driver of the fund,” says Eyroulet, while emphasising that digitalisation is not exclusively offered by tech stocks.

The fund has also outperformed because of other criteria, such as its systematic environmental, social and governance (ESG) approach and its growth and quality stocks, he adds.

“By quality we mean quality of the franchise, quality of the management, a solid balance sheet. It’s a high conviction portfolio, with only 35 stocks,” he notes.

Most recently, the fund has seen support from national recovery plans, which target energy efficiency, digitalisation and smart mobility, Eyroulet explains.

Mid to long-term outlook

Building resilience against future crises is a priority for the EU, and Neckermann expects that this will lead to related public investments in the mid term.

He says: “Three smart city areas that should see increased attention and investments are:

  • Smart building and infrastructure (including crowd thermal monitoring and touchless entry systems),
  • Connectivity (including 5G and network roll-outs); and
  • Smart mobility (making public transport palatable once again, facilitating bicycles and micro-mobility, and accelerating electrification).

“This includes surveillance and quick-response measures for acute health emergencies, but also for our longer-term struggle with climate change,” Neckermann adds.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.