Return on investment with meaning.
Impact-investment. Creating social benefit while generating attractive long-term returns is the goal of NN Investment Partners' Smart Connectivity strategy. Companies are sought that benefit from the shift towards a more sustainable economy, have a positive impact on the environment or society and contribute to the UN's sustainability goals with their innovative solutions.
"Did you know that around four billion people worldwide live in cities?" asks Ivo Luiten, Lead Portfolio Manager at NN Investment Partners (NN IP). "They generate around 60 percent of global GDP, but are also responsible for 70 percent of climate-damaging emissions. So to reduce greenhouse gas emissions and limit global warming, urban infrastructure is a very important place to start."
Buildings need to become more sustainable, transportation more efficient and less polluting, and the networks and infrastructure through which people communicate more reliable.
To turn cities into smart cities, infrastructure investments are needed above all. "These are likely to rise from the current ten trillion dollars a year to around 40 trillion dollars a year by 2040," says the expert, concluding, "So the potential for successful and innovative companies in this area is huge."
Robust infrastructure is one of four starting points of the smart connectivity strategy. Then there's security, with a focus on cybersecurity; improving productivity through software or automation; and broad knowledge sharing, particularly via the internet. "So we are looking for companies whose technological innovations support the shift towards a more sustainable world and therefore benefit from a long-term growth trend," says Luiten.
The big challenge, of course, is finding such companies. "We start our investment process by analysing potential companies in terms of ESG criteria - to what extent do they meet environmental and social criteria - and whether they take a responsible and transparent approach to corporate governance."
The next step is the analysis of classic, fundamental investment ratios. "We take a rather conservative approach here. The companies should already be established and profitable, i.e. generate a positive net profit for the year. The growth potential must be convincing. And the valuation reasonable." However, sustainable companies - especially from the technology sector - have also not been cheaply valued for a long time. "That's true, but the key is that we can expect sustained, structural growth over the long term. Then there is upside potential in stocks, even if they don't currently look cheap," Luiten explains.
One example is Alfen Beheer, a Dutch supplier of substations, energy storage systems and charging stations for electric cars. The company is thus benefiting from the shift towards a low-carbon economy and also has good growth prospects for years to come. In the first half of 2021, revenue climbed 29 percent from a year earlier, while net income rose 77 percent. "Even though the valuation doesn't look cheap right now with a price-to-earnings ratio in the triple digits, the company will grow into it," Luiten concludes.
But the most difficult and costly part of the selection work is the impact analysis - what does the company actually do that is positive? "We do this for each individual company using a three-step process we developed ourselves," Luiten explains. "The first step is to ask what proportion of revenue is associated with a positive impact and for how many people the company is making a positive measurable change," the portfolio manager explains, citing an example: "Helios Tower, which focuses on building and expanding mobile infrastructure in Africa, now provides 75 million people with access to mobile telephony and the internet via its mobile towers. This enables many to start a business, make money transactions and ultimately find a way out of poverty."
The second step is then to examine the effect in more detail. Is the positive impact just an accidental byproduct of normal business activity, or is it truly embedded in a company's DNA? "I want to know if the primary goal of management is to achieve positive impact," Luiten explains.
Then, in the third stage, he looks at whether the company's contribution to a better world is truly significant. "For example, we wanted to invest in a manufacturer of smart electricity metering systems. Actually, it was a good fit because these systems help save electricity. But we then found that the effect was very limited in terms of the energy transition and thus did not meet our high standards for impact."
At Helios, on the other hand, this is demonstrably significant. "Not only does this give many people in Africa access to the 4G network, but it also gives farmers, for example, access to better weather forecasts, which has a positive impact on crop yields. An upward spiral begins."
"This creates a portfolio of companies that have attractive return potential, but at the same time create a positive social or environmental impact with a substantial solution. And thus, ultimately, are likely to make the world a little better and investors a little wealthier," Luiten explains.
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// How to invest - in smart connectivity.
From the Impact strategy, NN IP has constructed the NN (L) Smart Connectivity fund (ISIN: LU0332192961). The portfolio consists of 35 to 40 stocks. The four growth sectors mentioned are weighted approximately equally to ensure sufficient diversification. The fund is currently invested to around 30 percent in software companies and just under 24 percent in IT companies. In addition, the focus is on small and mid-cap companies.
Over the past five years (as of 09/30-21), the fund has earned 17.10 percent per year. As of 08/31/2021, the portfolio has a 97 percent lower carbon footprint compared to the MSCI World, generates 98 percent less waste, and uses 93 percent less water.
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