NewNet Investor Profile, WHEB Asset Management

1 June 2010

Nicola Donnelly, WHEB Asset Management

WHEB Asset Management was created in 2008 as a specialist fund-management business backed by European cleantech venture capital firm WHEB Ventures. The IM WHEB Sustainability Fund was launched in June 2009 as a global, long-only fund, targeting the themes of climate change, water and demographics.

The fund aims to take advantage of the market conditions to position the portfolio defensively or towards growth stocks. While the valuations of cleantech companies may have fallen sharply during the last year, Donnelly predicts that a renewed momentum could signal real recovery and attractive returns in the future.

What led to the formation of the fund?

‘Essentially, it was a meeting of minds – Clare and I were planning to launch a fund in this area and WHEB were also looking at the possibility of becoming a long-only investor in listed equities. We combined the two to launch the fund.’

How does your background inform your approach to this space?

‘We have both been involved in sustainability investing our entire careers, but more often for a bigger company where you are a specialist. The advantage with WHEB is that you are surrounded by like-minded individuals.
‘Clare began managing sustainable and environmental funds at Jupiter in 1990 where she managed the Jupiter Ecology Fund and Jupiter International Green Investment Trust. In 1994 she and her team moved to NPI, where they set up the Global Care range of fund. In 2001, she established the Sustainable Future range of funds at Morley.

‘I recently managed large charity and Cambridge college endowments as a director at UBS, and worked on the CIS Sustainable Leaders Trust.’

What is your investment strategy?

‘The focus of the fund is threefold – targeting the megatrends of climate change, water resources and demographic trends. We have a subsequent universe of 400 companies. These areas have been beneficiaries of recent stimulus spending, with around 15 per cent of that being spent on these three areas. Currently we are focusing particularly on areas including energy efficiency and water metering. We have positioned the fund quite defensively initially, with a focus on pharma and utilities in particular, which plays into the demographic and water themes.’

How important are government stimuli and incentives to this industry?

‘Government stimulus packages are important in so far as a lot of these companies rely on them to some extent, albeit for some the package was an additional fillip. When looking at these areas it almost requires a change of modus operandi for a fund manager to be able to take this into account.

‘Stimulus plans of the kind we have been seeing recently have had such a focus on green issues that one has to acknowledge something has changed in governments, translating talk into actions.’

In terms of geography, how do you view the market currently?

‘We do not have a benchmark as such, but we aim to beat the world market, best measured by the MSCI world. Our correlation with any benchmark is low and we have the ability to produce less volatile returns. Currently we are focused on the UK short-term, while longer-term on the US and China.’

How can you see the space in which you operate developing?

‘I think the route is still foggy in terms of legislation but there is consensus on the destination and what needs to be done to get there. Experienced fund managers should be able to navigate any volatility.

‘In the short term we will see a great deal of focus on energy and water efficiency and healthcare reform. In the longer term there is going to be a shift towards infrastructure spending, the smart grid, and of course what we see come out of China in terms of incentives will be key.’

Since launching the fund have your perspectives changed at all?

‘There has been something of a change in the general market attitude since we launched back in June. The markets had a run up to our launch and we were concerned that they were getting ahead of themselves, given that much of the positive news flow had not come through yet. We were correct and happy to be defensively positioned during the pull-back. Since then we have seen a more sustained rally, positive news flow and investors’ confidence has returned.

‘Aside from improving economic data, the bullishness has been predicated on a low interest rate environment that wasn’t necessarily sustainable. For the last few months we had been expecting a step back from stimulus spending by governments, with a possible raise in interest rates. In late November we saw the crisis in Dubai. Interestingly, the reaction from the markets was not to pull back, which indicated that some people remain very bearish, with potentially a lot of cash sitting on sidelines. This helped to illustrate that in our view, this extraordinary rally has legs.

‘Following this, we were left relatively confident of a further market rally to the end of the year. We do feel that it is important to be wary of valuations as companies strengthen, we definitely need to see sustainable growth rates. It is really more of a stock pickers market at the moment, and it pays to be more selective, you need to take the profits where you can, and to be more circumspect.’

What is the outlook for 2010?

‘We are increasingly bullish about the entire climate change theme. We have increased our exposure to this area to 40 per cent, and we anticipate a Copenhagen-led rally into the new year. We’re not expecting anything revolutionary to come out of the climate change talks, but the optimism is fuelled more by the months of government announcements, commitments and legislative support for this area. Areas like energy efficiency, smart grid, electric vehicles and renewable energy have been positively affected as a result of recent stimulus packages and the general supportive consensus behind Copenhagen.’

Where are the opportunities to be found?

‘For us, the hot prospects are to be found amongst the later stage companies. We are looking more at established companies in areas such as insulation, and general energy efficiency. Energy efficiency in buildings in the UK is looking particularly strong as a result of recent government announcements on the Warm Front programme, smart metering and smart grids. Alternatively, solar is beginning to look interesting from a valuations point of view and will be supported in the UK by feed-in tariffs from April 2010. Globally we are seeing orders picking up, and some of the financing which had previously disappeared as banks collapsed or merged is coming from other sources, whether stimulus spending, grants, or lending.

‘Also, on a global perspective, China’s announcement regarding its emissions intensity targets will have a huge effect on the global energy markets. With their emissions intensity targets of 40-45 per cent below 2005 levels by 2020, and increasing non-fossil fuel consumption to 15 per cent by 2020, the country’s vast energy capacity will mean repercussions for energy technology and generation across the spectrum.

‘In the US, Obama has also made offers, targeting 17 per cent by 2020 from 2005 levels. Even if no legally agreement is reached at Copenhagen, I suspect that the US will use the Environmental Protection Agency (EPA) to regulate CO2. We are seeing an increasing political will and initiatives across the globe with the US announcing $620m in smart grid funding. There are many countries, such as South Korea, Brazil, Russia and Japan making national commitments to emissions reduction, which will need to be backed up by favourable policy and new technology.

‘To reach these emissions targets will be challenging these countries, but it looks as if they are beginning to realise that the easy wins are to be found in energy efficient buildings, whether monitoring usage, or retrofitting existing buildings to make them more efficient. This is definitely an area which we are going to be focusing on with some interest.’

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Tags: water

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