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smart citieS:
a powerful theme for the future

Innovative companies that help change the way we manage cities are a huge growth opportunity for investors.

The number of people who live in urban areas is set to rise from 55% to 70% by 2050, according to the UN.

As their populations rise, cities will have to find smarter solutions to meet the growing needs of their residents and improve quality of life.
Fortunately, innovative companies are devising new ideas and technologies to change the way cities are managed, reducing pollution, using resources more efficiently, and improving healthcare and social structures.

SmartCity, the latest theme fund from Pictet Asset Management aims to take advantage of these opportunities using a highly active approach and what it calls a smart purity filter. This calculates the percentage of revenues generated in urban areas to pinpoint the companies most likely to benefit from urbanisation.

Ivo Weinöhrl, senior investment manager, said: ‘We have over 20 years’ experience in thematic investing and believe that the thematic approach is a strategy for the future. We first identified its potential during the 1990s, when we were one of the first asset managers to launch a biotechnology product.

‘This was soon followed by our water strategy, which remains one of the few dedicated to this unique resource.

‘Since then, we have built a thematic range of 14 products including in timber, robotics and health, allowing our investors to access many enduring investment opportunities presented by megatrends.

‘Cities are making huge changes to deal with growing populations and reduce environmental impact, which also creates great opportunities for investors.’

Three main themes

Just how big is the opportunity set? By 2045, an extra two billion people will live in urban areas, which will put huge pressures on infrastructure, resources and the environment.

To address this, authorities are working ever more closely with the private sector to make cities safer, more sustainable and better connected. Overall, Pictet Asset Management believes the long-term opportunities in the smart cities investment universe could be as much as $4 trillion already, and is likely to keep growing as adoption expands.

‘To thrive, cities need to get smarter and work more closely with the private sector,’ said Weinöhrl. ‘That’s good news for the planet and for investors because it will create opportunities for many companies in urban development.

‘While the world economy is expanding by 3% a year, urbanisation-related firms could grow their revenues by more than 15% a year (Arthur D Little, “Smart cities – turning challenge into opportunity”, 2016).’

Policy increasingly supports the move to smart cities – for example, through the UN’s Sustainable Development Goals (SDGs), which call for more investments by 2030 to “make cities inclusive, safe, resilient and sustainable”. According to Citigroup, that alone will require $2.1 trillion of annual investment across infrastructure, housing, education, health, recreation and buildings.

In fact, Weinöhrl sees three broad areas emerging: building cities, running cities and living in them.

‘More people need more buildings: houses, offices, schools, and leisure centres,’ he said. ‘The challenge is to design, plan, construct and finance these buildings in an efficient and sustainable fashion.

‘China and India alone require up to 2.8 billion square metres of new residential and commercial space a year, according to McKinsey.’

What people want from buildings will also evolve as technology and demographics change. For example, the rise of the ‘Internet of things’ – with the number of connected devices forecast to reach 25 billion by 2020 (Gartner, February 2017) – will fuel demand for high powered internet.

Equally, as the world population ages and urban density rises, demand for lifts and other accessible features will increase – the elevator market is forecast to grow to $125 billion by 2021 from $89 billion in 2015, according to Statista.

To run efficiently, urban areas need better transport; water; energy and waste management; logistics facilities; and public services. Combatting poor air quality is also a priority. Businesses that provide these things in a way that helps cities run smoothly and sustainably should do well.

At their smartest, cities will be good for the planet and the economy. The Global Commission on the Economy and Climate recently found investing in lower-emission public transport, using more renewable energy and increasing efficiency in commercial buildings and waste management in cities could cut energy costs by about $17 trillion worldwide by 2050. It could also cut commuting times and improve general liveability. Los Angeles, for example, has already cut its energy use by 63%, saving $10 million on electricity bills and maintenance fees per year, by installing LED units, according to The Climate Group.

Flexible offices, such as those offered by WeWork, The Office Group and IWG, are another strong growth industry. Globally, the number of people using co-working spaces is forecast to grow by 1.74 million to 5.1 million by 2022, according to the Global Co-working Unconference Conference.

Demographic developments are also shaping the demands of city dwellers. For example, a growing number are single, creating appetite for a wider variety of housing such as smaller apartments and shared flats.

A market for self-storage facilities, bicycle parking and various sharing economy initiatives is also emerging.

Active share

Weinöhrl said all these factors create a sizeable investment opportunity for a high-conviction manager. The SmartCity fund has an active share of approximately 94% to the MSCI World, meaning the portfolio looks very different to the index, he said. That is also likely to add diversification to portfolios.

‘Our portfolio tends to have a higher weighting to mid-caps and emerging markets compared to more mainstream global equity portfolios,’ he said. ‘The design of the thematic strategies incorporates a broader view of alpha, one that goes beyond simply beating an index.
‘Thematic investing uses a holistic approach, starting with the selection of an appropriate investment universe.

‘We are very long term and we try to identify companies that are below the radar of many other investors due to investment constraints in areas such as region, sector, market cap or time horizon.’

Weinöhrl added the fund has a unique mix of sectors and style characteristics, making it attractive for investors who are willing and able to get away from the herd and take a longer-term view.

‘Pictet-SmartCity aims to deliver long-term capital growth by investing in companies that are helping develop the sustainable, better-connected cities of tomorrow,’ he said. ‘These firms will be active mainly, but not exclusively, in mobility and transportation; infrastructure; real estate; and sustainable resources management. The fund will also focus on technologies and services that support the development of smart and sustainable cities.’

Weinöhrl highlighted research from McKinsey estimating that adopting a smart-city concept can improve key quality of life indicators, such as health, safety and environmental quality by 10% to 30%.

‘Embracing that – and continuing to innovate – is crucial for the future of our increasingly urban world,’ he said.

Thomas Potter-Landua

Research Analyst, Citywire

SECTOR OVERVIEW:
thematic

Thomas Potter-Landua

Research Analyst, Citywire

The Pictet SmartCity fund was launched last year with the SmartCity strategy approximately six months old. The fund was repositioned and renamed SmartCity in 2018 replacing a high dividend yield fund established in 2010.

The recent rebranding last year was part of the changes at Pictet Asset Management, designed to strengthen specific teams and promote in-house talent. Some of those changes seem to be working: since senior investment manager Ivo Weinöhrl took over the helm last year, the fund has outperformed the IA Global and MSCI World indices.

While it’s too early to tell whether this good run can continue, the strong performance of recent stock additions by Weinöhrl, such as Visa and MasterCard (both digital infrastructure firms supporting cities) as well as Bright Horizons Family Solutions (an intelligent workplace company), is encouraging.

Ivo Weinöhrl hasn’t managed any funds tracked by Citywire since 2016, so it’s impossible to gauge his recent managerial skill. However, his performance between 2013 and mid-2016 was very strong, with his Deutsche US Equities Fund comfortably outperforming the S&P 500 index – an index that’s notoriously difficult to beat given its high analyst coverage and efficiency.

After outperforming for 36 months, he became eligible for a Citywire rating in July 2015, and debuted as an AA-rated manager owing to his stellar performance in 2013 and 2014. For 8 of the following 11 months he was AA-rated, and he never slipped below an A-rating, before joining Pictet Asset Management in July 2016.

Weinöhrl consistently ranked in the top 10% of all managers tracked and ranked by Citywire between 2015 and 2016.
Prior to managing the SmartCity fund Weinöhrl was a Senior Investment Manager within the Pictet utilities/high dividend yield team.

Q&A with ivo Weinöhrl

fund manager hot-seat

Senior Investment Manager,
Pictet Asset Management

Q&A with ivo Weinöhrl

Fund manager hot-seat

Senior Investment Manager,
Pictet Asset Management

What constitutes a ‘smart city’?

In a nutshell, a smart city improves the quality of life of its citizens and ensures the ongoing urbanisation trend is sustainable. It does so by having the capacity to collect, aggregate and analyse the data generated by our increasingly technological and connected world, sometimes referred to as the internet of things, and then applying those insights to our day-to-day lives to solve the challenges human activity generates. The classic example would be a smart parking meter.

It will be an important theme for all of us in the coming decades, as governments around the world are racing to use technology in almost all aspects of a city’s operations. This includes areas like water, power, waste management, transport, e-government, IT connectivity and even citizen participation. So far, cities like Singapore, which launched a smart nation programme in 2014, Dubai and Barcelona are leading the way.

The benefits are huge: it allows local governments to track energy consumption, pollution, crowding and crime in order to build and better manage different suburbs or towns. That’s going to be huge going forward, as cities try to become more efficient and environmentally friendly; smart technology can help cities sustain growth and improve citizen welfare.

And for the layman, meanwhile, it can make things a lot easier when it comes to finding destinations, tracking packages, taxis or transport, paying bills, and hopefully saving money.

Why is this theme relevant to investors?

In order to manage rapidly growing populations, cities around the world will have to adapt to protect human wellbeing and reduce our environmental impact. For this to happen, we will have to make them more intelligent.

These challenges will generate an abundance of investment opportunities across a broad range of sectors, especially as cities around the world embrace the idea of smart cities and leveraging solutions such as big data and the internet of things in order to solve these pressing issues.

Companies active in mobility and transportation, infrastructure, real estate, sustainable resource management or services catering to urban lifestyles, all have a role to play in supporting this transformation. And so those are the sorts of companies we’re looking to add to the portfolio.

Where will the funding come from? Aren’t a lot of governments around the world heavily indebted?

That’s true. But at the same time, they face significant pressure to act on several fronts. On the one hand, the Sustainable Development Goals set out by the UN in 2015 aim to tackle some of our biggest challenges by 2030, and Goal #11 deals specifically with ensuring cities are inclusive, safe, resilient and sustainable.

This will be driving the global policy agenda, and investments, over the coming decade. At the same time people around the world are increasingly demanding better quality of life for themselves and their children – from the air they breathe to access to more efficient healthcare.

But given the lack of excess cash on public balance sheets, a large portion of “smart city” investments will have to come from public-private partnerships or directly from the private sector. And this is already happening. We have a great example in New York City, where the transformation of disused phone boxes into a city-wide network of superfast, free Wi-Fi kiosks, was funded by selling advertisement on screens placed above the kiosks.

How do you translate such a theme into investments?

We see three promising segments of investments for the theme:

• BUILDING THE CITY: companies involved in the design, planning and construction of tomorrow’s cities, with a focus on efficiency and sustainability.
• RUNNING THE CITY companies that provide traditional, but essential infrastructure like water supply and waste management, digital infrastructure like 5G communication or payment networks, and new, more efficient mobility solutions.
• LIVING THE CITY: companies that offer services and solutions for 21st century urban living, including housing, working and recreational activities.

All three of these categories harbour innovative business models whose growth and success will be powered by population expansion and the overarching goal of improving people’s quality of life.

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