APG makes strategic €150m alternative energy bet

Giant Dutch investor allocates 4% of global top-down fund to green/alternative theme.

APG Asset Management, the wholly-owned fund manager of the €180bn Dutch ABP civil servants pension fund, has taken a position worth about €150m ($215m) in companies with green and alternative energy businesses after betting on a mix of low valuations and governmental stimulus packages for the sector. The manager has bought a basket of 40 companies wholly or partly involved in green energy production or product supply as part of its €3.5bn Global Top-down Strategies Fund. Frank Smudde, fund manager at APG in the team of five that runs the strategy, said the basket represents 4% of the total fund, but is a significant exposure to the alternative energy theme. As its name implies, the Global Top-down Strategies Fund doesn’t select stocks but rather identifies performance potential from sector or regional trends and then allocates to a related basket of companies.
The strategy acts as a thematic overlay on top of existing stock bets identified by APG portfolio managers, allowing APG to overweight macroeconomic drivers. Smudde says the latest allocation is based on the theme of diminishing traditional fossil fuel energy supplies coupled with the emergence of alternative energy supplies: “We could clearly see the potential in thistheme in recent years but weren’t able to call it ‘good value’ because of the very high share prices, so we didn’t participate in the rally. In the first half of this year we felt prices were right to start investing.” APG made its first investments at the end of May: “We came up with a basket of about 40 companies and weighted them based on market cap, which is a fairly diversified approach.” The stocks selected will not surprise managers already exposed to the environmental sector. They include Areva, the nuclear power company, Vestas Wind Systems and ABB, the Swiss power group, which has a large energy efficiency division. Smudde says: “We’re not trying to find any hidden jewels. We’re looking for the right kind of exposure to the development of alternative energies which we think will have sizeable potential to come.” The low carbon exposure of some of the investments, Smudde says, is a bonus. But he underlines the main rationale for the allocation as the clear trend toward alternative energy and the availability of well-priced companies. Smudde says the holding period for the stocks isn’t a hostage to quarterly performance or a desire to ‘go green’, but is based on long-term analysis: “Any decision to sell a theme depends absolutely on market price.”

Those long-term trends, he says, are underpinned by the increasing scarcity of new oil finds: “Maintaining current supply levels requires massive investment. At the same time, technology is advancing quickly in the alternative energy sector and costs are coming down. The third argument is the level of government support in the form of tax exemptions and credits that is underpinning green energy in order to buck the dependency on oil, which is often foreign, and to protect the environment.”Risks, he says, include the seriousness of political commitment to the sector: “So far we think the plans outlined are genuine, transparent and based on growing public pressure. There is also a danger that targets for renewable energy could lead to higher prices for consumers, which could cause a backlash. Continued technological innovation is also another risk. You need to look closely at what you invest in. However, looking at all the trends and pricing together we decided the time was right to move into the market.”